Suppose in the Republic of Sasquatch that the regulation of banking rested with

Question

Suppose in the Republic of Sasquatch that the regulation of banking rested with the Sasquatchian Congress, including the determination of the reserve ratio. The Central Bank of Sasquatch is charged with regulating the money supply by using open market operations. In September 2015, the money supply was estimated to be 50 million yetis. At the same time, bank reserves were 5.0 million yetis and the reserve requirement was 10 percent. The banking industry, being "loaned up," lobbied the Congress to cut the reserve ratio. The Congress yielded and cut the reserve requirement to 8 percent. The potential impact of this action could the money supply by mion yetis. (Round your response to one decimal place.,)

Explanation / Answer

At Present , 10% of reserve requirements, the reserves are (5 Million Yetis /50 Million Yetis) = 10% of the money supply.

With decrease in reserve requirements by 2 % (from 10% to 8%), money supply will increase by = 2%

Hence, Revised reserve Requirement will be increase by ( 50 Millions Yeti X 2%) i.e. 1 Million Yeti.

Hence, The Potential impact of this action could increase the money Supply by 1 Million Yetis

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