ECON 1BB3 Chapter Notes - Chapter 24: Money Multiplier, Reserve Requirement, Money Supply

The balance sheet for First National Bank is shown below: Assets Liabilities Reserves $200 Deposits $1000 Loans $800 The reserve requirement is 10%. The money multiplier is 10. First National can (increase, decrease) the money supply. The amount First National Bank can change the money supply. $100 The potential increase in the money supply. 

6. The purpose of this exercise is to illustrate the multiple expansion of bank deposits in a fractional- reserve banking system. Assume the Fed’s legal reserve requirement is 10%

(Formula)

1. a. Required reserves = Required reserve ratio ´ checkable deposits

b. Actual reserves = Required reserves + excess reserves

The consolidated balance sheet of the U.S. banking system indicates:

Assets Liabilities

Reserves $40,000 Checkable deposits $100,000

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 $_______________.

QUESTION 1

Refer to this scenario for all of the questions on this problem set.

The balance sheet of the only bank in a simple economy is shown below. The reserve requirement is 10%. If cash in the hands of the non-bank public is $3,000, the Money Supply = ___________________.

QUESTION 2

Suppose people deposit $1,000 of their cash into checking accounts. In the balance sheet below, enter the new totals in all of the accounts, immediately following the transaction, before the bank does any new lending.

QUESTION 3

Recall that cash in the hands of the non-bank public was initially equal to $3,000. Thus, immediately following the $1,000 deposit, currency in the hands of the non-bank public = _____________

QUESTION 4

And Deposits = ______________