Question

marks) Meg tutors ten students during the final week of term and is paid $5,000 in cash. She deposits the $5,000 in Bank A. The desired reserve ratio is 20% and banks always loan the maximum possible. a) Starting with a $5,000 deposit in Bank A, complete the following table. Increase in Deposits (S) Desired Reserves Bank Loans (S) 3 20 o All Other Banks All Other Deposits All Other Loans If the desired reserve ratio is 20%, what is the money multiplier? 2.0 If the desired reserve ratio is 20%: from the initial S5,000 deposit, what are Bank A's 1. Desired ReservesSuo 2. Excess Reserves What will be the maximum deposits after all rounds are completed? (Show your formulas and calculations). c) loo aso-os d) e) What are the maximum Loans attainable?Exctmuhhe (Show your formulas and calculations). Cum tely+ What is the maximun increase in the money supply? (Show your formulas and calculations). Ifthe desired reserv e ratiodecreases to 5%, what will be the total money supply from the S5 000 deposit in Bank A, after all rounds are completed. g)

Answer 1

All above calculations are correct.

f) Maximum increase in money supply =   ( Money multiplier * Total initial deposit)

( 5 * 5000 ) = $25000

g) If the reserve ration decreases by 5% which means bank needs to reserve less cash with them and they can lend more money and money supply will increase.

Total money supply = ( Money multiplier * Total initial deposit) or ( Total initial deposits / Reserve ratio )

Now the reserve ration requirement is 15% hence money multiplier = 1/15% = 6.667

Total money supply = ( $5000 * 6.667) = $33335