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Excess Reserves and the Money Multiplier

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Calculate the required numbers given the following information:

(1) If the reserve ratio requirement is 5%, what is the money multiplier? ___________

(2) If the total deposits in the banking system are $250 million, what aggregate amount of dollars must be held by the Fed for all banks? ______________

(3) What is the amount of excess reserves? ________________

(4) What is the potential deposit creation into the banking system? _____________

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Solution Preview

Hi, answers are below:

1. The money multiplier is the inverse of the reserve ratio requirement, 1/RR, so in this case it ...

Solution Summary

This solution runs through a few basic concepts in monetary economics, including excess reserves, the money multiplier, and potential deposit creation.

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Money multiplier, credit creation, required reserve ratio

Please help with the following problem.

Use a simple Balance Sheet for a typical bank, which has $5,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of $0.
a. What is the value of money multiplier?
b. If the bank lends it's maximum amount of excess reserve, what would be the total amount credit creation in the entire banking system with this initial deposit of $5,000?
c. If Fed raises the required reserve ratio to 20%, how will it change your answers to a & b above?

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