Question

# Consider that there is only one bank and its balance sheet is as follows Use it...

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 rrD = 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.

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

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