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The table below shows the balance sheet (in millions of dollars) for three banks. a. Suppose the required reserve ratio is 5

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Answer #1

a.

Bank of East Los Angeles:

Assets Liabilities
RR: (120x5%=) $6 Deposit: $120
ER: (120-6=) $114

Bank will provide ER as loan further.

Bank of Alhambra:

Assets Liabilities
RR: (114x5%=) $5.7 Deposit: $114
ER: (114-5.7=) $108.3

Bank will provide ER as loan further.

Bank of Pasadena:

Assets Liabilities
RR: (108.3x5%=) $5.415 Deposit: $108.3
ER: (108.3-5.415=) $102.885

b.

Money created= Initial deposit x money multiplier

Money multiplier= 1/reserve ratio(rr)= 1/0.05= 20

Money created= $120 x 20= $2400

c.

Currency drain ratio= Cr= 0.1

Multiplier= (1+Cr)/(rr+Cr) = (1+0.1)/(0.05+0.1)= 1.1/0.15= 110/15= 22/3

d.

Money created= Initial deposit x multiplier=  $120 x 22/3= $880

e.

Excess reserve ratio(Er)= 10%=0.1

Multiplier= (1+Cr)/(rr+Cr+Er)= (1+0.1)/(0.05+0.1+0.1)= 1.1/0.25= 4.4

Money created= Initial deposit x multiplier= $120 x 4.4= $528

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