If the Federal Reserve decreases the reserve rate from 5% to 2%, how does this affect the amount of money that would result because of fractional reserve banking from an initial deposit into a bank of $25,000?

A.It increases the amount by $500,000.

B.It decreases the amount by $750,000.

C.It increases the amount by $750,000.

D.It decreases the amount by $500,000.

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danndraj91 danndraj91 · Answer 1 · 2018-10-26T11:07:01-04:00

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Step-by-step explanation:

wrong it was the increase by 750,000

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shivishivangi1679 shivishivangi1679 · Answer 2 · 2022-06-07T09:37:04-04:00

If the Federal Reserve decreases the reserve rate from 5% to 2%. The correct answer is C. It increases the amount by $750,000.

Debit shows withdrawal of an amount. The balance from which it is debited decreases as a part of it is taken out.

Total balance after withdrawal = Initial balance - debited amount

Opposite to it is a deposit. When some amount is added (to a bank account, or locker etc), its called deposit of that amount.

Total balance after withdrawal = Initial balance + deposited amount

If the Federal Reserve decreases the reserve rate from 5% to 2%.

5% reserve ratio,

The Fed can create up to 1.05=20 times the initial deposit.

2% reserve ratio,

The Fed can create up to 1.02 = 50 times the initial deposit.

So lowering the reserve ratio would increase the amount of money made.

Hence, The correct answer is C. It increases the amount by $750,000.

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