Question

1. If the required reserve ratio is 10%, how much a new $10,000 deposit can a bank lend? What is the potential impact on the money supply? 2. A bank currently holds $150,000 in excess reserves. If the current reserve requirement is 12.5%, how much could the money supply change? How could this happen? 3. The trading desk at the Federal Reserve sold $100,000,000 in T-bills to the public. If the current reserve requirement is 8.0%, how much could the money supply change?

I need full answers with explanation ASAP

Answer 1

ANSWER:

1) RESERVE RATIO =10%

Amount to be retained = $10,000 * 10% = $1,000

Amount that can be lend = new deposit - amount to be retained = $10,000 - $1,000 = $9,000.

Potential money supplier = 1 / reserve ratio = 1 / 10% = 1 / 0.1 = 10

so when the deposit is $10,000 , the money supply will be = deposit * money supplier = $10,000 * 10 = $100,000.

so the money supply increases to $100,000.

2) The money supply could increase if the bank lends its excess reserves.

reserve ratio = 12.5%

potential money supplier = 1 / reserve ratio = 1 / 12.5% = 1 / .125 = 8

If the bank lends all the excess reserves , the money supply could increase by = amount in excess reserves * money supplier = $150,000 * 8 = $1,200,000.

3) Reserve requirement = 8%

money supplier = 1 / reserve requirement = 1 / 8% = 1 / .08 = 12.5

The sale of t bills will decrease the money supply as the contraction will be = t bills * money supplier = $100,000,000 * 12.5 = $1,250,000,000.