03/07/14 Multiple Deposit Expansion

• Reserve Requirement
• The Fed requires banks to always have some money readily available to meet consumer's demand for cash.
• The amount, set by the Fed, is the required Reserve Ratio.
• The required reserve ratio is the % of demand deposits (Checking account balances that must not be loaned out.)
• Typically the reserve requirement ration is 10%
• The Money Multiplier
• Similar to the spending multiplier, the money multiplier shoes us the impact of a change in demand deposits on loans and eventually the money supply. 
• To calculate the money multiplier, divide 1 by the required reserve ratio
• Money multiplier= 1/reserve ratio
• Ex: If the reserve ratio is 25%, then the multiplier is 4.
• The three types of Multiple Deposit Expansion Question
• Type 1- Calculate the initial change in excess reserves.
• a.k.a the amount a single bank can loan from the initial deposit.
• Type 2- Calculate the change in loans in the banking system.
• Type 3- Calculate the change in the money supply
• Sometimes type 2 and type 3 will have the same results (i.e. no fed involvement)
• A formula for all seasons 
• <{[Deposit- (rr% x Deposit)] x 1/rr} + $ of OMO
• <Maximum change in money supply>
• [Initial change in excess reserves]
• (Required reserve)