TB MC Qu. 04-35 The Fed changes reserve requirements from...

The Fed changes reserve requirements from 10 percent to 13 percent, thereby eliminating $700 million in excess reserves. The total change in deposits (with no drains) would be (rounded):

Question

TB MC Qu. 04-35 The Fed changes reserve requirements from...

The Fed changes reserve requirements from 10 percent to 13 percent, thereby eliminating $700 million in excess reserves. The total change in deposits (with no drains) would be (rounded):

BlackTom AI · Accepted Answer

Let's begin by restating the problem to ensure clarity: The Fed raises reserve requirements from 10% to 13%, eliminating $700 million in excess reserves. We are to determine the total change in deposits, assuming no drains.
Option A: $7.912 billion. This value would imply a calculation using the difference between 1/0.10 and 1/0.13 or some misapplication of the multiplier. Since the problem provides a direct amount of reserves eliminated (0.7 billion) and a new reserve ratio (13%), this figure does not align with the straightforward reserves-to-deposits conversion at the new ratio.
Option B: $6.625 billion. This number could arise from a composite or mistaken multiplier application (perhaps combining old and new ratios incorrectly). However, it does not correspond to simply dividing the eliminated reserves by the new reserve requirement.
Option C: $5.385 billion. This matches the correct logic: the amount of deposits supported by the remaining reserves after the change can be estimated by dividing the eliminated excess reserves by the new reserve ratio. Specifically, 0.7 billion / 0.13 ≈ 5.385 billion. This reflects the idea that with a higher reserve requirement, the same amount of reserves can back a smaller amount of deposits, so the provided excess reserves translate into a larger potential deposits figure when assessed at the new ratio.
Option D: $4.905 billion. This would correspond to dividing 0.7 billion by an effective reserve ratio of about 0.143, which is not the given 13% and thus is not consistent with the stated problem.
Option E: $4.234 billion. This is even smaller, implying a much higher implied reserve ratio or a different interpretation of the reserve base, neither of which matches the problem's 13% requirement.
In summary, only Option C correctly applies the new reserve requirement to the eliminated excess reserves, yielding 0.7 billion / 0.13 ≈ 5.385 billion. The other options reflect misapplications or incorrect arithmetic involving reserve ratios and the relationship between reserves and deposits.

TB MC Qu. 04-35 The Fed changes reserve requirements from... The Fed changes reserve requirements from 10 percent to 13 percent, thereby eliminating $700 million in excess reserves. The total change in deposits (with no drains) would be (rounded):

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