Question

Examine the following simplified T-account for First Federal Savings Bank to answer questions 1 to 10. Assume a 10% minimum reserve requirement.

Assets	Liabilities
Reserves $30,000	Deposits $150,000
Loans $120,000

1. a) What is the reserve ratio for this bank?

b) What is the value of excess reserves for this bank?

c) After First Federal Savings Bank lends out its excess reserves to Justin, suppose that Travis deposits 1000 into his account at First Federal Savings Bank. The new value of deposits in the T-account at this bank is 151000, the new value of reserves is 16000 and the new minimum required amount of reserves at this bank is 15100. Continuing from the previous information given, suppose that the bank lends out as much as possible from Travis's deposit to Griffin, while maintaining the new minimum reserve requirement. What is the new value of loans in the T-account at this bank?

d) By how much does the money supply increase from Travis's deposit, according to the money multiplier effect?

Answer 1

a) Reserve ratio for the given bank = Reserves/Deposits = $30,000/$150,000 = 0.20 = 20%

b) Required reserve ratio = 10% = 0.10

Required reserves = Required reserve ratio * Deposits = 0.10 * $150,000 = $15,000

Excess reserves = Actual reserves - Required reserves = $30,000 - $15,000 = $15,000

c) After the First Federal Savings Bank lends out its excess reserves, and Travis deposits $1,000 in the Bank, the T-account of the Bank consists of:

Deposits = $151,000

Reserves = $16,000

Loans = $135,000

Required reserves = $15,100

=> Excess Reserves = Actual reserves - Required reserves = $16,000 - $15,100 = $900

Therefore, the loans of the Bank increase by $900 => Loans on the T-account = $135,000 + $900 = $135,900

d) Money multiplier = 1/(Required reserve ratio) = 1/(0.10) = 10

Total increase in the money supply due to Travis's deposits = Deposits * Money multiplier = $1,000 * 10 = $10,000