Question

If the Fed buys $1$million of bonds from the First National Bank, but an additional $10\%$ of any deposit is held as excess reserves, what is the total increase in checkable deposits? (Hint: Use T-accounts to show what happens at each step of the multiple expansion process.)

Short answer

The total increase in the checkable deposits is 10 million.

Step-by-step solution

Concept Introduction

Checkable deposits are payable on request, which means that when a depositor requires payment by making a withdrawal of funds, the bank is obligated to pay it instantly in the exact amount requested. The depositor is also permitted to transfer the funds directly to a third party, and have full admission to all account details, such as inflows and outflows, any fees charged, and interest gained. Checkable store accounts are exceptionally fluid resources that permit contributors to have agreeable admittance to their assets. Hence, checkable stores regularly are a significant, yet additionally one of the most minimal expense, wellsprings of bank finances safeguarding a huge portion of bank liabilities.

Explanation

Initial deposit and currency utilized by $1$million when a person deposits money in the first national bank then bank maintain an$10\%$of deposits as reserves and lend the remaining$90\%$i.e. $900000$.since people do not save money so$900000$again deposited into the bank and lead to rising in deposits from 1 million to $1900000$to balance the balance sheet reserves also improves this process continues until bank reserves become $10\%$of the total deposits

Therefore, the total increase in checkable deposits localid="1647168904273" $=\frac{1000000\times 1}{CRR}$

localid="1647168911758" $=\frac{1000000\times 1}{10\%}$

localid="1647168917817" $=10million$

Final Answer

The total increase in the checkable deposits is 10 million