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? _____________

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.

This problem relates to theMoneyMultiplier rather than the spending multiplier. This is a very important problem on money creation.
The First National Bank has reserves of $150,000 and demand deposits equal to $1,200,000. The reserve ratio is 10 percent. How much in excessreserves does the bank now have? What is the maximu

Suppose the financial institutions are required to keep 11% in reserve andthe ratio of individuals' currency holdings to their deposits is 21%. What is themoneymultiplier ? If the financial institutions suddenly became concerned about the safety of their loans, andthey decide to keep 2% excessreserves (reserves held by b

Sometimes banks wish to hold reserves in excess of the legal minimum. Suppose that banks are initially fully loaned up andthe required reserve ratio is 0.1. Then the Fed makes an open market purchase of $100,000 in government bonds, and each bank decides to hold excessreserves equal to 5 percent of its deposits.
a) Derive

The required reserve ratio is 5%
Assets: Liabilities:
Cash- $24 mil Demand Deposits- $180 mil
Deposits w/ Fed.- $16 mil Time deposits- $10 mil
Loan- $100 mil Capital- $10 mil
Treas. Securities- $60 mil
So I got the following:
Level of reserves is $40 mil.

The question asked that suppose that the legally required ratio of reserves to deposits is 1/10. If $100 million in excessreserves aremade available to the banking system, by how much can the banking system increase themoney supply? What is the answer if the legally required ratio of reserves to deposits is 1/6 rather than 1/1

Please help to understand how to do these equations.
Given original deposits of $1,000 and a reserve requirement of 10%;
a) How much new money could be created?
b) What would be the total reserves required?
c) What is themoney supply multiplier?

Please see the attached file.
1. If the government spending multiplier is 6, what is the tax multiplier?
2. You are given this account for a bank:
ASSETS LIABILITIES
RESERVES $ 500 $ 3,500 DEPOSITS
LOA

Assume that the following data describe the condition of the banking system:
Total Reserves: $200 billion
Transactions Deposits: $800 billion
Cash held by the public: $100 billion
Reserve Requirement: 0.20
a) How large is themoney supply (M1)?
b) How large are the required reserves?
c) How large are excess re

1. Assuming individuals hold no currency, calculate the simple moneymultiplier using the following reserve ratios:
5%, 10%, 20%, 25%, 50%
2. What is the impact of these ratios on the level of new money that can be created given a $100,000 cash deposit into the banking system?