3. In archangefor his many years ofhord work and devotion, Notional Corp Inc. gives Dave 31 00, 000 in Thoads. Dave setis these bonds to the Fed, and the Fed deposits the money in Dove 's bani: account. A. By how much does the money supply change as a result of this deposit into Dave's account from the Fed? Explain. The money supply change by 900,000 because the change in excess reserves is 90,000 and the money multiplier is 10. B. A bank's actual reserve ratio is the percentage of total deposits a bank actually holds on to. It is made up of the percentage they are required to hold on to,I known as the required reserve ratio, plus any extra they choose to hold on to. Suppose Dave's bank has an actual reserve ratio of 12%, and his bank makes a loan to Darlene based on the funds from Dave's deposit. How much does the money supply increase as a result of this second step? It increases by $333,333.33 C. Darlene uses the money to buy a very expensive pair of soccer cleats from Arthur. Arthur deposits this money in his bank account. His bank holds onto 12% of the deposit and lends the rest out. How much does the money supply increase as a result of this step? It increase by $6,944,444.42 D. In total, by what amount does the original $100,000 that the Fed released into circulation end up increasing the money supply if every bank holds 12% of its deposits? If ARR is 10%, then the maximum change in money would be 100,000 I .1 which is $1,000,000. E. This example shows the increase in the money supply caused by an increase in bank deposits. Explain why this activity by banks is called money creation. This is called money creation because while the central bank is responsible for the initial creation and destruction of money, and the Fed is responsible for the size of the money supply, it relies on banks and the money multiplier to enhance its activities