Question

In: Economics

Examine the following simplified T-account for First Federal Savings Bank to answer questions 1 to 10....

Examine the following simplified T-account for First Federal Savings Bank to answer questions 1 to 10. Assume a 10% minimum reserve requirement.

Assets	Liabilities
Reserves $30,000	Deposits $150,000
Loans $120,000

context:

After First Federal Savings Bank lends out its excess reserves to Justin, suppose that Travis deposits $1,000 into his account at First Federal Savings Bank. What is the new value of deposits in the T-account at this bank? A: 151000

Continuing from the previous question, what is the new value of reserves in the T-account at this bank? A: 16000

1. Continuing from the previous question, what is the new minimum required amount of reserves at this bank?

2. Continuing from the previous question, suppose that the bank lends out as much as possible from Travis's deposit to Griffin, while maintaining the new minimum reserve requirement. What is the new value of loans in the T-account at this bank?

3. By how much does the money supply increase from Travis's deposit, according to the money multiplier effect?

I would appreciate it if you could help me understand it!

Expert Solution

Sol :

New balance sheet after justin's loans and Travin's deposits

Assets	Amount	Liabilities	Amount
Reserves	16000	Deposits	151000
Loans	135000

1) New Minimum required amount of reserves is the 10% of the total deposits with the bank

Deposits = $151000

Minimum reserves requirement = 151000 x 10%

= $15100

2) Travin;s deposits with the bank = $1000

Minimum reserve = $100

Total excess reserve = $900

so, total amount of loan given to Griffin's is = $900

New value of loans = $12000 (Given) + 15000 (Loan to Justin) + 900 ( Loan to Griffin's)

= $135900

3) Money Multiplier is equal to = 1/ reserve requirement

= 1 / 10%

= 10 times

Travin's deposits is equal to $1000

so , total money supply would be equal to = $1000 x 10 = $10000

Rahul Sunny answered 2 years ago

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