1. What is the maximum amount of new loans that this bank can make? The bank is only required to keep 10% of the demand deposits as reserves. 10% of $99000 is $9900. The bank can therefore make loans up to $99,000 - 9900 = $89,100. It has actually made loans worth $66,000. So even with no change in the required reserve ratios the bank can still make additional loans worth $23,100.
2. Assume that the bank makes these loans. What will the new balance sheet look like? If the Fed reduces the required reserve ratio to 8%, the bank is now required to keep 8% of $99,000, or $7920. The bank can then make loans worth $99,000 - 7920 =$91,080.
3. By how much has the money supply increased or decreased? The bank has already made actual loans worth $66,000 so it can further loan out $91,080-66,000 = $25,080.
4. …show more content…
If the money multiplier is 5, how much money will ultimately be created by this event? If they made these loans, the balance sheet would look like this:
Assets
Cash: $7,920
Loans: $91,080
Liabilities
Demand Deposits: $99,000
5. If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work? If the bank actually loans out as much as allowed, then the initial increase in money supply is $25,080. The final increase when all rounds have been completed will be determined by the money multiplier that is given by 1/r, where r is the required reserve ratio. Given that r is 8%, the multiplier is 1/0.08 = 12.5. Hence, the increase in money supply is 12.5 x 25,080=
2. Assume that the bank makes these loans. What will the new balance sheet look like? If the Fed reduces the required reserve ratio to 8%, the bank is now required to keep 8% of $99,000, or $7920. The bank can then make loans worth $99,000 - 7920 =$91,080.
3. By how much has the money supply increased or decreased? The bank has already made actual loans worth $66,000 so it can further loan out $91,080-66,000 = $25,080.
4. …show more content…
If the money multiplier is 5, how much money will ultimately be created by this event? If they made these loans, the balance sheet would look like this:
Assets
Cash: $7,920
Loans: $91,080
Liabilities
Demand Deposits: $99,000
5. If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work? If the bank actually loans out as much as allowed, then the initial increase in money supply is $25,080. The final increase when all rounds have been completed will be determined by the money multiplier that is given by 1/r, where r is the required reserve ratio. Given that r is 8%, the multiplier is 1/0.08 = 12.5. Hence, the increase in money supply is 12.5 x 25,080=