Four types of Multiple Deposit Expansion Questions

1: Calculate initial change in excess reserves
- The amount a single bank can loan from initial deposit

2: Calculate change in loans in the banking system

Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the maximum change in loans in the banking system from this Federal Reserve purchase of bonds. 

Initial Change in ER x Money Multiplier = Max Change in Loans

$80 million x (1/.20)
$80 million x 5 = $400 million max in new loans

 3: Calculate change in money supply

1. Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the maximum change in the money supply from this Federal Reserve purchase of bonds.
2. Maximum Change in Loans + $ Amount of Federal Reserve action
3. $400 million + $100 million = $500 million max change in the money supply

[Sometimes Type 2 and Type 3 will have same result (i.e. No fed involvement)]

4: Calculate change in demand deposits

1. Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the maximum change in demand deposits from this Federal Reserve purchase of bonds.
2. Maximum Change in Loans + $ Amount of Initial Deposit
3. $400 million + $100 million = $500 million max change in demand deposits