Question

Assume, the following: Initial deposit into a new bank of $15,000, reserve requirement is 12%: Calculate the following Calculate level of total Reserves, Required Reserves and Excess Reserves - show all work or no credit till be given - which of the above represents the lending capability of the bank Calculate the money multiplier when the reserve requirement is 12%? Show all work or no credit will be given. Calculate the impact on the money supply of the bank fully loaning up - show all work Calculate the impact on the money supply if the bank does not fully loan up but lends 80% of available funds - show all work

Answer 1

Initial deposit = $15,000

Reserve requirement = 12% or 0.12

When the new deposit is made, it increases reserves by same amount.

So,

The level of total reserves is $15,000.

Required reserves = Initial deposit * reserve requirement

Required reserves = $15,000 * 0.12 = $1,800

So,

The level of required reserves is $1,800.

Excess reserves = Total reserves - Required reserves = $15,000 - $1,800 = $13,200

So,

The level of excess reserves is $13,200.

The level of excess reserves represents the lending capacity of the bank.

Calculate the money multiplier -

Money multiplier = 1/Reserve requirement =1/0.12 = 8.33

The money multiplier is 8.33.

Calculate the total increase in the money supply -

Total increase in the money supply = Excess reserves * Money Multiplier

Total increase in the money supply = $13,200 * 8.33 = $109,956

The money supply of the bank fully loaning up would increase by $109,956.

It is provided that bank lends 80% of funds available.

Initial amount given as loan = $13,200 * 0.80 = $10,560

Calculate the total increase in the money supply -

Total increase in the money supply = $10,560 * 8.33 = $87,964.8

Thus,

The money supply will increase by $87,964.8 if the bank does not fully loan up but lends 80% of the available funds.