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Required Reserve Ratio in Cambridge Bank

Karen has kept her entire life savings, $50,000, in a floor safe underneath her bed. This morning, she decided to deposit her savings in a checking account at Cambridge Bank.

The following assumptions apply to all parts of this question:
â?¢Prior to her deposit, Karen was the only person in the U.S. that held cash
â?¢All banks in the U.S. are identical and hold 2% of their checking deposits as excess reserves

a. Consider the balance sheet of Cambridge Bank:

ASSETS LIABILITES & NET WORTH
Reserves $ 1,500,000 Checking Deposits $15,000,000
Loans $14,000,000 Net Worth $500,000

What is the required reserve ratio? Show your calculations.

b. How much did the money stock (using the definition we used in class, roughly equal to M1) change as a result of Karenâ??s deposit?

Solution Preview

Required Reserve Ratio
Karen has kept her entire life savings, $50,000, in a floor safe underneath her bed. This morning, she decided to deposit her savings in a checking account at Cambridge Bank.

The following assumptions apply to all parts of this question:
â?¢Prior to her deposit, Karen was the only person in the U.S. that held cash
â?¢All banks in the U.S. are identical and hold 2% of their ...

Solution Summary

This posting offers help with calculating reserve ratio.

$2.19