Question

Suppose John makes new total deposits of $100,000 at Bank “B” and Tom receives a loans of $80,000 from Bank ‘B’. Suppose the required reserve ratio is 0.2 or 20% (this is determined by the Fed).

a. What is the level of required reserves Bank “B” must hold after John makes his deposit?

b. What is the level of excess reserves?

c. Compute total reserves

d. Compute the money multiplier

e. Suppose required reserves increased by $30,000 by how much will money supply change, (assume everything else remains the same)?

Answer 1