Money Multiplier Practice Problem
Suppose in the Banking System (all numbers are in millions):
Total Reserve = $72
Required Reserve Ratio = 10% of deposits
Currency in circulation = $ 400
Checkable deposits = $ 600
Money Supply = $1,000
Given these initial conditions, Assume Fed sells $2 million in securities to the First National Bank.
What is the effect on total reserves and the monetary base? Use T-accounts for both the bank and the federal reserve to explain your answer.