Homework Answers
Answer :
1st part :
Required reserve ratio = 12% = 0.12
Interest charged by banks on loans = 10% = 0.10
For every $1000 in deposits, required reserves by the banks = $1000 * 12% = $1000 * 0.12 = $120
Fed did not pay interest on bank reserves
Thus the forgone interest on $120 at 10% = $120 * 10% = $120 * 0.10 = $12
2nd part :
Again no interest on reserves
Required reserve ratio now = 15% = 0.15
Interest charged by banks on loans now = 5% = 0.05
For every $500 in deposits, required reserves by the banks = $500 * 15% = $500 * 0.15 = $75
Forgone interest on $75 at 5% = $75 * 5% = $75 * 0.05 = $3.75
Answer : Option C) $3.75
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