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Suppose that the Federal Reserve (the Fed) buys $100 million of government debt obligations from private owners. This creates$100 million of new money and sets off a chain reaction because of the "fractional reserve" banking system. When the (.85)^2(100)$million additional dollars. This process may be repeated indefinitely. Compute the total amount of new money that can be created theoretically by this process, beyond the original$100 million. (In practice, only about an additional $300 million is created, usually within a few weeks of the action of the Fed.)
To find the amount created, notice that the money generated by each tax cut gives geometric series and find its sum using the standard formula .
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