How does Fed work as a banker’s bank?
How does Fed work as a banker’s bank?
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Changes in Monetary Policy:
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 contractionary monetary policy using reserve requirement, how would that work?