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# Fed funds rate in the banking system

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a) Third National Bank is fully loaned up with reserves of \$30,000 and demand deposits equal to \$100,000. The reserve ratio is 10%. Households deposit \$10,000 in currency into the bank. How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit?

b) What is the fed funds rate in the banking system? Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.

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#### Solution Preview

a) Third National Bank is fully loaned up with reserves of \$30,000 and demand deposits equal to \$100,000. The reserve ratio is 10%. Households deposit \$10,000 in currency into the bank. How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit?

Total Deposit = Original Deposit + Additional Deposit
=100000+10000
=\$110000
Reserves= Reserve ratio * Total ...

#### Solution Summary

Solution discusses the fed funds rate in the banking system

\$2.19