If we assume the required reserve rate is ten percent (0.1), and that the public does not change their currency holdings and that banks do not hold any excess reserves, what will be the change in deposits resulting from a $150 million open market purchase by the Fed?
What will be an ideal response?
We can use the following equation: ?D = 
?RR where D = the change in deposits, rD = the required reserve rate, and RR is the change in required reserves. When the Fed purchases $150 million of securities in the open market, these become banking system reserves, since one of our assumptions is the banking system does not hold any excess reserves, banks will expand deposits (make loans) until the $150 million injection of reserves are being used as required reserves. Inserting the values of 0.1 for rD and $150 million for RR; the D = $1.5 billion.
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