Suppose we live in an economy with just one bank. Mary is the first customer of...

Suppose we live in an economy with just one bank. Mary is the first customer of the bank and makes a deposit of $500. The required reserve ratio is 10%. (Show Work)

(a) What is the excess reserve amount? With this amount of excess reserve, is the bank allowed to make any loans?

(b) What is the maximum amount of loan that the bank can make if the borrower does not withdraw the money.

(d) What is the money multiplier?

Solutions

Expert Solution

1 - Required reserve = 500*10 %

= $ 50

Excess reserve = 500-50

= $ 450

The bank will be able to lend $ 450 as loans. Only the amount of excess reserve can be given as loans

2 - The bank can make a loan of 500-50

= $ 450 .

3 - When customer withdraws the amount

Remaining amount = 400

Required reserve = 40

Maximum loan bank can make now = 400-40

= $ 360

4 - Money multiplier = 1/ reserve ratio

= 1/0.10

= 10.

Rahul Sunny answered 1 year ago

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