Question

In: Economics

1. The Bank of Key West is not going to have enough reserves at the end...

1.

The Bank of Key West is not going to have enough reserves at the end of the business day to meet its reserve requirement of 10%. It currently has two options to borrow money overnight in order to meet the requirement. First, it could borrow money from the Federal Reserve at a rate of 1.35%. Second, it could borrow money from other banks at a rate of 0.65% .

What is the federal funds rate, and what is the discount rate?

2. Suppose Robina Bank receives a deposit of $51,589 and the reserve requirement is 3%. Answer the questions using this information.

a) What is the amount that Robina Bank must keep on hand as required by the Federal Reserve (Fed)?

b) What is the amount that Robina Bank must have in excess reserves from this initial deposit?

c) What is the total change in the M1 money supply from this one deposit?

3. Suppose that the central bank has increased the money supply such that there is an additional $851077 in excess reserves. If the reserve ratio is 6.0 percent, what is the maximum increase in money supply? Round your answer to the nearest dollar.

Solutions

Expert Solution

Question 1.

Federal fund rate is the rate which is charged by the bank for lending overnight loan to the other bank or institutions Hence the federal fund rate = 0.65%

Discount rate = It is the rate which is charged to commercial banks or other institutions for lending the loan from federal reserve

Hence the discount rate = 1.35%

Question 2.

Total deposits = $51589

Reserve requirement = 3%

(a) Total money keep by bank = $51589 * 3% = $1547.67

(b) Total amount of excess reserve = ( $51589 - $1547.67) = $50041.33

(c) M1 money includes demand deposits, physical currency, coins etc.

Total change in deposits = Money multiplier * Initial deposits

(1/3%) * $51589

= $1719633.33

Question 3.

Reserve ratio is the fedral requirement to hold the cash. Excess amount can be lend by the bank.

Money multiplier = 1/ 6% = 16.67

Total excess reserve which can bank lend = $851077

Maximum increase in money supply = Money multiplier * Excess reserve

= 16.67 * $851077 = $14184616.67

Rahul Sunny answered 1 year ago
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