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Total reserves: ________

Deposits: $500,000

Required reserves: $20,000

Excess reserves: $80,000

Loans: $ 400,000

Total assets: $500,000; Total liabilities $500,000

1. By how much will the banking system be able to expand the money supply? What would be the money supply in the economy?

2. If the Fed increases the reserve requirement from your answer to part a to 10 percent, explain verbally and show numerically what will happen to:

a. Required reserves?

b. Excess reserves?

c. The size of the money multiplier?

d. The money supply in the economy?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019
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Related questions

6. The purpose of this exercise is to illustrate the multiple expansion of bank deposits in a fractional- reserve banking system. Assume the Fed’s legal reserve requirement is 10%

(Formula)

1. a. Required reserves = Required reserve ratio ´ checkable deposits

b. Actual reserves = Required reserves + excess reserves

The consolidated balance sheet of the U.S. banking system indicates:

Assets Liabilities

Reserves $40,000 Checkable deposits $100,000

a. The simple money multiplier equals _______________. Formula:

b. The banking system has excess reserves of $_______________.

Formula (write out formula #1a):

Formula (write out formula #1b):

c. Loans and the money supply can be expanded by a maximum of $_______________.

7. The purpose of this exercise is to show what happens to the maximum money-creating ability of the banking system when the Fed lowers the reserve requirement. Assume the Fed’s reserve requirement is 1%. Use the balance sheet in question 6.

(Formula)

The consolidated balance sheet of the U.S. banking system indicates:

Assets Liabilities

Reserves $40,000 Checkable deposits $100,000

1. a. Required reserves = Required reserve ratio ´ checkable deposits

b. Actual reserves = Required reserves + excess reserves

Must write out the mathematical formulas and show your calculations

a. The simple money multiplier equals _______________. Formula

b. The banking system has excess reserves of $_______________.

Formula (write out formula #1a):

Formula (write out formula #1b):

c. Loans and the money supply can be expanded by a maximum of $_______________.

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

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