The BASIC financial system has a required reserves ratio of 15 percent, initial excess reserves are $5 million, cash held by the public is $1 million and is expected to stay at that level, and there are no other leakages or adjustments in the system.
a. What would be the money multiplier and the maximum amount of checkable deposits?
b. What would be the money supply amount in this system after deposit expansion?
c. Rework the former problem, assuming that the cash held by the public drops to $500,000 with an equal amount becoming excess reserves and the required reserves ratio drops to 12 percent.