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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 is5%. Households deposit $20,000 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? Show all work.

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

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Nusrat Fatima
Nusrat FatimaLv10
28 Sep 2019

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Related questions

(a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits of $28,000 into the Third National Bank. How much excess reserve does your deposit generate for the bank?

What is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.

(b.) What is the Federal Funds Rate in the banking system?E Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.

(a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits of $28,000 into the Third National Bank. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

How much excess reserve does your deposit generate for the bank?

What is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.

(b.) What is the Federal Funds Rate in the banking system?

Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.

6. we noted that in ancient times money was normally created by government. However, under the modern banking system in the U.S. and other developed countries, money is normally created by Banks. The process begins when a depositor brings, let’s say, $100 in M1 into the bank for deposit. The bank accepts the deposit and creates a Demand Deposit (DD) for the customer in the amount of $100. The bank now has $100 in liquid funds it did not have before. As discussed in class, there are three things the bank can do with this new money: 1) It can keep the money as Vault Cash (a lot of it inside of ATM machines), 2) It can place the money on deposit at the Federal Reserve Bank (Fed) to be held as Reserves, 3) It can purchase securities for the bank’s securities portfolio. The contents of the bank’s security portfolio will not be included in M1. What is it about the definition of M1 that precludes the inclusion of the bank’s securities portfolio?

7. As discussed in class, all bank deposits at the Federal Reserve Bank (Fed) qualify as Reserves. However, not all Reserves are the same. The Fed makes a distinction between Required Reserves, and Excess Reserves. What is the difference between Required Reserves and Excess Reserves?

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