Question

Project Description:

2. You are the Federal Reserve Police and you go into Uckville Bank. When you check the vault you see $1.6 million The reserve requirement is 5.0% and on the books are $28 million in outstanding checkable deposits.
a. By how much more in checkable deposits can Uckville expand? Show work.
b. What are the excess reserves? Show work.
c. Now make up your own Federal Reserve Police problem and solve it. Show work.

Answer 1

1.

1600000/.05 = 32 million This is maximum checkable deposits allowed

Current checkable deposits = 28 million

Uckville can expand by $4000000

2.

Excess reserves= existing reserves- required reserves

Required reserves = $28 million * 0.05 = 1400000

Excess reserves= $1600000 - $1400000= $ 200000

3.

You are a Federal Reserve Police and you go into the Whoville bank. When you check the vault, you see $200,000. The reserves requirement is 6% and on books are $2,200,000 in outstanding checkable deposits.

What is the maximum allowed in checkable deposits?

$200,000/.06= $3,333,333

What are the required reserves?

$2,200,000 x .06= $132,000

By how much can this bank expand the money supply in checkable deposits?

$3,333,333- $2,200,000= $1,133,333

What are the excess reserves?

$200,000- $132,000= $68,000