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Prepare an analysis on the Reserve requirements

Prepare an analysis by answering the questions below.
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
Balance Sheet for Ecoville International Bank
ASSETS // LIABILITIES
Cash $33,000 // Demand Deposits $99,000
Loans 66,000
Required:
Now assume that the Fed lowers the reserve requirement to 8%.
1. What is the maximum amount of new loans that this bank can make?
2. Assume that the bank makes these loans. What will the new balance sheet look like?
3. By how much has the money supply increased or decreased?
4. If the money multiplier is 5, how much money will ultimately be created by this event?
5. If the Fed wanted to implement a contradictory monetary policy using reserve requirement, how would that work?

Solution Preview

Prepare an analysis by answering the questions below.
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
Balance Sheet for Ecoville International Bank
ASSETS // LIABILITIES
Cash $33,000 // Demand Deposits $99,000
Loans 66,000
Required:
Now assume that the Fed lowers the reserve requirement to 8%.
1. What is the maximum amount of new loans that this bank can make?
2. Assume that the bank makes these loans. What will the new balance sheet look like?
3. By how much has the money supply increased or decreased?
4. If the money multiplier is 5, how much money will ultimately be created by this event?
5. If the Fed wanted to implement a contradictory monetary policy using reserve requirement, how would that work?

Prepare a 2-3 page analysis by ...

Solution Summary

Solution helps in analyzing reserve ratios and estimating money supply.

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