In recent years, the Fed has shown a willingness to decrease existing reserve requirements. Suppose that the transaction deposits at banks and other financial institutions total $900 billion and that a reserve requirement of 10 percent applies only to these deposits. Also assume that financial institutions never have excess reserves and all monies that they lend are deposited in transaction accounts.
a. By what dollar amount will transactions deposits increase if the Fed reduces the reserve requirement to 8 percent?
b. By what percentage will transaction deposits increase if the Fed changes the reserve requirement to 8 percent?
c. How will transaction deposits change if the Fed increases the reserve requirement to 12 percent?