Suppose the Reserve Requirement on Transaction Deposits Is Set by the Federal

Multiple Choice

Suppose the reserve requirement on transaction deposits is set by the Federal Reserve System at 15 percent and the banking system presently holds $25 million in excess reserves. Assuming all payments are made in the economy by drafts (checks) against transaction deposits, there are no leakages of funds into thrift deposits or additional excess reserves, all funds received are immediately loaned out by depository institutions as soon as they are received, what is the maximum volume of new deposits and loans that can be created by the banking system (rounded to the nearest million dollars) ?

A) $4 million
B) $7 million
C) $250 million
D) $167 million
E) $135 million
F) None of the above