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?
Deposits = 1,000
Reserve requirement = 0.1
Required reserves = 1,000 * 0.1 = 100
The required reserves of bank is 100.
Desired excess reserve ratio = 0.05
Desired excess reserves = 1,000 * 0.05 = 50
The desired excess reserves of bank is 50.
Calculate the reserves that can be utilized for making loans -
Reserves = Total reserves - Required reserves - Desired excess reserves
Reserves = 500 - 100 - 50 = 350
The reserves that can be utilized for making loans 350.
The new loans bank can issue is 350.
Calculate the money multiplier -
Money multiplier = 1/(reserve ratio + desired reserves ratio) = 1/(0.1+0.05) = 1/0.15 = 6.67
The money multiplier is 6.67
Calculate the change in money supply -
Change in money supply = New loans issued by bank * Money multipier = 350 * 6.67 = 2,334.5
The money supply will increase by 2,334.5
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