7. The purpose of this exercise is to show what happens to the maximum money-creating ability of the banking system when the Fed lowers the reserve requirement. Assume the Fedâs reserve requirement is 1%. Use the balance sheet in question 6.
(Formula)
The consolidated balance sheet of the U.S. banking system indicates:
Assets Liabilities
Reserves $40,000 Checkable deposits $100,000
1. a. Required reserves = Required reserve ratio ´ checkable deposits
b. Actual reserves = Required reserves + excess reserves
Must write out the mathematical formulas and show your calculations
a. The simple money multiplier equals _______________. Formula
b. The banking system has excess reserves of $_______________.
Formula (write out formula #1a):
Formula (write out formula #1b):
c. Loans and the money supply can be expanded by a maximum of $_______________.