Question

Consider that there is only one bank and its balance sheet is as follows Use it to answer the next questions.

Assets		Liabilities
Reserves	$26,000	Demand Deposits	$160,000
Loans	$134,000

Let rr_D = 10%, e= 5% and c=10%.

1- What is the value of this bank’s undesired excess reserves?

a. +$13,000

b. +$5,000

c. +$2,000

d. -$4,000

e.   -$15,000

2- What is the value of the money multiplier for this problem?

a. 10

b. 5.5

c. 5.0

d. 4.4

e. 4.0

3- At the outset of this problem, what is the level of the money supply (M1)?

a. $125,000

b. $160,000

c. $176,000

d. $242,000

e. $320,000

4- In order to reach a final equilibrium, the money supply will have to change by:

a. +$2,000

b. +$8,800

c. +$26,000

d. +$71,500

e. -$71,500

5- At the final equilibrium, the value of the undesired excess reserves will be:

a. +$2,000

b. +$1,000

c. -$2,000

d. -$8,000

e. None of the above.

Answer 1

1) Ans - c) +$2,000

Required Reserves = Rd * Deposits = 10% of Deposits = 10% of $160,000 = $16,000

Excess Reserves = e * Deposits = 5% of $160,000 = $8,000

Thus, Excess Reserves = $26,000 - $16,0000 - $8,000 = $10,000

2) Ans - d) 4.4

Money Multiplier = (1+c)/(e+c+Rd) = (1+0.1)/(0.05+0.1+0.1) = 1.1/0.25 = 4.4

3) Ans - c) $176,000

Money Supply = C + D = Currency in Circulation + Demand deposits = 10% of $160,000 + $160,000 = $176,000

4) Ans - b) +8,800

Money Supply change required to reach equilibrium = Money Multiplier * Undesired excess reserve

= 4.4 * (+$2000) = +$8,800