Question

The initial money market supply and demand in an economy is given by: Money supply: Ms = $100,000 Money demand: MD 600,000 – 4,000,000r = The following table shows the changes in deposits, reserves and loans of five banks following a $40,000 initial deposit in Best Bank, after the Fed made an open market operation purchase of securities from Best Bank. Only the five biggest banks are shown here, but there are many other banks in the economy. Assume that all banks are loaned up, meaning that they do not hold any excess reserves. Bank Best Bank Genius Financial Premium Bank Century Bank Polar Plus New Deposit ($) 40,000 36,000 48,000 46,576 14,000 Required Reserve ($) 4,0 3,600 4,800 Loans ($) 36,000 32,400 43,200 (a) Calculate the required reserve ratio given the information in the table above? (4 pts) (b) Calculate the reserves held and the amounts loaned out by Century Bank and Polar Plus. (3 pts + 3 pts + 3 pts + 3 pts) (c) Calculate the money multiplier in the economy? (4 pts)

Answer 1

A - Reserve ratio = Reserve / Deposit * 100

= 4000/40000*100

= 10 %

All the banks have the same reserve ratio

B - Century bank -

Reserve = 46576*10/100

= $ 4657.6

Loaned amount = 46576-4657.6

= $ 41918.4

Polar plus -

Reserve = 14000*10/100

= $ 1400

Loaned amount = 14000-1400

= $ 12600

C - Money multiplier = 1/ Reserve ratio

Reserve ratio = 10 %

Money multiplier = 1/0.10

= 10.