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Consider the following simplified balance sheet of a commercial bank:

ASSETS  and LIABILITIES

Vault cash $200 

Deposits $3500

Deposits at the Federal Reserve $300

Loans $3000

1.The required reserve ratio is 10 percent.

Find Actual Reserves $....... , Required Reserves $..... , and Excess Reserves $ ......

2. By how much can this bank increase its loans? $........

3. What is the money (deposit) multiplier equal to?.........

4. By how much can the entire banking system expand their loans? $ .......

5. How much new wealth is directly created from this expansion of deposits?

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Darryn D'Souza
Darryn D'SouzaLv10
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 $_______________.

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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