Question

1) Suppose a bank receives a $1000 deposit. The required reserve ratio is 10%. The bank...

1) Suppose a bank receives a $1000 deposit. The required reserve ratio is 10%. The bank makes an $850 loan and holds $150 in reserves.

a. What are excess reserves? [5pts]

b. Now suppose the depositor withdraws $100 to buy treasuries. What are excess reserves? (Hint: both reserves and deposits have changed.) Enter this as a negative number if the bank is not meeting its reserve requirement. [5pts]

c. Due to this withdrawal, the bank demands _____________ federal funds and supplies ____________ federal funds. [5pts]

d. Demonstrate what happens in the market for Federal Funds graphically. Show how the federal funds rate and the quantity of federal funds changes. [10pts]

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Homework Answers

Answer #1

Answer (a) Required reserves = 10% of deposits = 10% of $1,000 = $100

Total reserves = $150

Excess reserves = Total reserves - required reserves = $150 - $100 = $50

Excess reserves is $50

Answer (b) $100 withdrawn from deposits.

Total deposits will be $1000 - $100 = $900

Required reserves will be 10% of $900 = $90

Loans are granted of $850

Total reserve will be $900 - $850 = $50

Excess reserves will be $50 - $90 = - $40

Excess reserves will be - $40. Bank is not meeting minimum reserve requirements.

Answer (c) bank demand $40 fedral funds and supplies $850 fedral funds.

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