Question

21.​Imagine that Odyssey National is a brand new bank, and that its required reserve ​ratio is 10 percent. If it accepts a $1,000 deposit, then its required reserves ​balance will be:

​a. ​$0

​b.​$90

​c.​$100

​d.​$900

​e.​$910

22.​If the required-reserve ratio is a uniform 25 percent on all deposits, the money ​multiplier will be:

​a.​4.00

​b.​2.50

​c.​0.40

​d.​0.25

23.​Assume a simplified banking system subject to a 10 percent required-reserve ​ratio. If there is an initial increase in excess reserves of $90,000 and all possible ​loans are made, the money supply:

​a.​increases $90,000.

​b.​increases $900,000.

​c.​increases $990,000.

​d.​decreases $90,000.

​e.​Stay at the current output; the firm is losing $200.

24.​If the Fed wishes to increase the money supply then it should:

​a.​increase the required reserve ratio.

​b.​increase the discount rate.

​c.​buy government securities on the open market.

​d.​do any of the above.

Answer 1

Q21) Required reserve Balance = required reserve ratio*deposit

= 0.1*1000

= 100

Thus, the answer is (c) $100

Q22) The formula for money multiplier = 1/required reserve ratio

= 1/0.25 = 4

Thus, the answer is (a) 4

Q23) Total increase in money supply = money multiplier*increase in excess reserve

= (1/0.1)*90000

= 900000

Thus, the answer is (b) increases $900000

Q24) The answer is (c) ​buy government securities on the open market. This injects money into the reserves of the commercial banks which they can use for lending and thus the money supply increases. INcrease in the required reserve ratio or increase in discount rate reduces hte money supply.