Critical analysis Q15 Suppose that the Federal Reserve purchases a bond for $100,000 from Juan, who deposits the proceeds in the Manufacturer’s National Bank. Initially, as a result of this bond purchase, the money supply will increase by $100,000.   If banks maintain reserves of 50% against their checking deposits, Manufacturer’s Bank will be able to extend $50,000.   In additional loans.If other banks also maintained reserves against their checkable deposits of 50%, the maximum potential expansion of the money

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A:

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Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.