Question

Consider a new deposit to the US banking system of $1000. Suppose that all banks have...

Consider a new deposit to the US banking system of $1000. Suppose that all banks have a desired reserve ratio of 20%. The following table shows how deposits, reserves, and loans enable the creation of money. Assume there is no currency drain and that banks do not hold on to excess reserves.

A. Complete the table below

Round Change in Deposits Change in Reserves Change in Loans
1 $1000 $200 $800
2
3
4
5

B. After 5 rounds, what is the total change in deposits as a result of the single NEW deposit?

C. What is the eventual total change in deposits?

D. What is the eventual change in the money supply?

E. What is the eventual change in reserves? In loans?

F. Assume that the Fed implements a new law that sets a required reserve ratio equal to 30%. How would this have changed your answers to the parts (c) and (d).

Homework Answers

Answer #1
Round Change in Deposits Change in Reserves Change in Loans
1 $1,000 $200.0 $800.0
2 $800 $160.0 $640.0
3 $640 $128.0 $512.0
4 $512 $102.4 $409.6
5 $410 $81.9 $327.7
Total Change in Deposits = 1/0.20*1000 $5,000.0
Change in Money Supply $5,000.0
Change in Reserves =1/0.8*1000 $1,250.0
Change in Loans $5,000.0
If Reserve Rate Changes to 30%
Round Change in Deposits Change in Reserves Change in Loans
1 $1,000 $300.0 $700.0
2 $700 $210.0 $490.0
3 $490 $147.0 $343.0
4 $343 $102.9 $240.1
5 $240 $72.0 $168.1
Total Change in Deposits = 1/0.30*1000 $3,333.3
Change in Money Supply $3,333.3
Change in Reserves =1/0.8*1000 $1,428.6
Change in Loans $3,333.3
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose there are $1000 of reserves in the banking system. Assume that banks are required to...
Suppose there are $1000 of reserves in the banking system. Assume that banks are required to hold 5% of their deposits as required reserves. Assume further, that banks wish to hold zero excess reserves. a. What is the total amount of deposits in the banking system? b. If banks decided to hold reserves in excess of those required what would happen to the money multiplier and the money supply? Why? c. If households decided not to deposit all their money...
1. The three players in the money supply process include A. Banks, depositors and the US...
1. The three players in the money supply process include A. Banks, depositors and the US Treasury B. Banks, borrowers and the Fed      C. Banks, depositors and the Fed D. Banks, depositors and borrowers 2. The monetary base consists of:      A. Currency in circulation and Federal Reserve notes      B. Currency in circulation and the US treasury’s monetary liabilities      C. Currency in circulation and reserves      D. Reserves and vault cash 3. When the Fed wants to...
Central Banks System Suppose a banking system with the following balance sheet has no excess reserves....
Central Banks System Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves. Assets Liabilities (in Billions) (in Billions) Tota reserves $150 Transactions accounts $500 Securities $150 Loans $200 Total $500   Total $500 You are required to answer the following Questions: 1) What is the...
Assume that the banking system is fully loaned up and that any open-market purchase by the...
Assume that the banking system is fully loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.15.  By how much could the money supply expand if the Fed purchased $1.75 million worth of bonds? Assume that the banking system is fully loaned up and that any open-market purchase by the Fed directly increases reserves in the banks. If the required reserve ratio is 0.15.  What is the initial increase...
Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves,...
Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves, answer the following questions: (2 points) The reserve requirement is 25 percent. Fill in the blanks in the table below. What is the deposit multiplier? Multiple Deposit Creation Round Deposits Reserves Loans Bank 1 Bank2 Bank3 Bank 4 Bank5 All other banks Totals SR1, 000,000 SR SR Now the reserve requirement is 5 percent. Fill in the blanks in the similar table. What is...
Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves,...
Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves, answer the following questions: (2 points) The reserve requirement is 25 percent. Fill in the blanks in the table below. What is the deposit multiplier? Multiple Deposit Creation Round Deposits Reserves Loans Bank 1 Bank2 Bank3 Bank 4 Bank5 All other banks Totals SR1, 000,000 SR SR Now the reserve requirement is 5 percent. Fill in the blanks in the similar table. What is...
Assume that Deposits are 1000, the reserve requirement is 0.1. The bank currently has 500 in...
Assume that Deposits are 1000, the reserve requirement is 0.1. The bank currently has 500 in total reserves, and a desired excess reserve ratio of 0.05. Assume c=0. How many new loans can the bank issue? What will be the change in the Money Supply?
Assets                                         &nb
Assets                                                        Liabilities ____________________________________________________________________ Cash (reserves)                $4,000                                Deposits $100,000 Deposited at the Fed       $5,000 Loans                                 $95,000                               Capital    $4,000 ______________________________________________________________________ Total                                   $104,000                                      $104,000 The required reserve ratio on all deposits is 5% What, if any, are the bank's excess reserves? How much amount will this bank be able to lend out? If there is no currency drain and all funds loaned out by this bank are deposited back in this bank, what are the bank's excess reserves, if any, after the new deposit has been made? Answer...
Some economists have advocated replacing government deposit insurance with 100-percent reserve banking. Under this plan, banks...
Some economists have advocated replacing government deposit insurance with 100-percent reserve banking. Under this plan, banks would hold all deposits as reserves. Deposit insurance would no longer be necessary because banks would always have the reserves to meet customer withdrawals. a. What would happen to the money supply (defined as currency and bank deposits) in the transition from fractional reserve to 100-percent reserve, if this plan were implemented, holding other factors constant? b. What will be the value of the...
1.Following a new deposit of $1000, the loans of a commercial bank increase by $900. In...
1.Following a new deposit of $1000, the loans of a commercial bank increase by $900. In this situation, the desired reserve ratio is most likely a.0 percent. b.10 percent. c.90 percent. d.190 percent. 2. If a bank holds $10,000 in desired reserves in order to meet a desired reserve ratio of 10 percent, demand deposits must equal a.$10,000 b.$20,000 c.$50,000 d.$100,000