On March 15, 2020, the Fed announced it had reduced the reserve requirement ratio from ten percent to zero percent effective March 26, 2020. It did so to encourage banks to lend all of their funds during the COVID-19 coronavirus pandemic. As of January 2022, this reserve requirement was still in effect.
Prior to the March 15 announcement, the Fed had just updated its reserve requirement table on Jan. 16, 2020.1 It required that all banks with more than $127.5 million on deposit maintain a reserve of 10% of deposits.
Banks with more than $16.9 million up to $127.5 million had to reserve 3% of all deposits. Banks with deposits of $16.9 million or less didn’t have a reserve requirement. A high requirement is especially hard on small banks. They don't have as much money to lend in the first place.
Q1: What is the maximum banking multiplier for a bank with $200 million deposits before the policy change?
Hint: Think about the formula of maximum banking multiplier
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Q2: What is the maximum banking multiplier for a bank with $200 million deposits after the policy change?
Hint: Think about the formula of maximum banking multiplier. Be careful about the math.
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Q3: How does the policy affect the amount of deposits in the banking system?
Hint: Recall the credit creation process and what is the determinant of maximum deposit.
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