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Money Supply: Money and Banks

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Attachment 13:

a) Required Reserve is 10% of 6,000 = $600. The bank has $640 in reserve and so the excess reserve is $640-$600 = $40
b) Over ONE cycle, this bank can lend all of the excess reserve of $40.

a) Deposits are 600 and required reserve is 30. So the required reserve ratio is 30/600 = 0.05 or 5%
b) Bank has excess reserve of 70 which it can lend out.

a) Step 1: There will be $12 million in liabilities recorded. As the reserve ratio is 20%, 2.4 million will go in the "Required Reserve" section and the remaining $9.6 million will go in the "Excess Reserve" section.
b) The Money supply had not been changed as the bank has not lend the money out yet.
c) Step 2: Once the bank fully uses the new lending capacity, the $9.6 million in excess reserve will go to Loans - "Total Assets". Throughout this process, make sure that the two accounts match up all the time. The debits should equal the credits.
d) The money supply will now increase as the ...

Solution Summary

The solution answers the 6 questions being asked. Detailed step by step answers are given with formulas and explanation. The economic concepts are very important to understand and the solution does a great job of answering the questions in a concise and easy to understand manner.