Question

5. If the required reserve ratio = 20% and you deposit $500 into your bank account, how much of it will the bank have to set aside in its required reserve account?__________ How much will be left over to place into excess reserves (ER)?__________. Now, once ER changes occur, how much money can ultimately be created by our banking system? __________. (3)

6. Now what if the required reserve ratio is changed to 10% and you deposit $500 into your bank account, how much of it will the bank have to set aside in its required reserve account?__________ How much will be left over to place into excess reserves (ER)?__________. Now, once ER changes occur, how much money can ultimately be created by our banking system? __________. (3)

7. Address the inside and outside lags associated with fiscal and monetary policy. If one policy suffers more significant lags, why use it? (3)

8. Read "Did the Fed Cause the Great Recession?" (Pages 454-455). Provide your thoughts on this historical downturn in our economy. Distinguish the culprit(s). How is the banking crisis a strong case for moral hazard? (3)

Answer 1

5.

If the required reserve ratio = 20% and there is a deposit of $500.

Then Reserve with bank=deposit x required reserve ratio= $500 x 20%= $100

Excess reserve with bank=(deposit-reserve)= $500-$100= $400

Total money created by the banking system= Deposit x money multiplier

Money multiplier= 1/required reserve ratio= 1/20%= 100/20=5

Total money created by the banking system= Deposit x money multiplier= 500 x 5= $2500

6.

Now If the required reserve ratio = 10% and there is a deposit of $500.

Then Reserve with bank=deposit x required reserve ratio= $500 x 10%= $50

Excess reserve with bank=(deposit-reserve)= $500-$50= $450

Total money created by the banking system= Deposit x money multiplier

Money multiplier= 1/required reserve ratio= 1/10%= 100/10=10

Total money created by the banking system= Deposit x money multiplier= 500 x 10= $5000