Assets |
Liabilities |
||
Loans |
Deposits |
$65 million |
|
Required Reserves |
|||
Excess Reserves |
$2 million |
||
Treasury Securities |
$5 million |
(a)
Deposits = $65 million
Reserve requirement = 3% or 0.03
Required reserves = Deposits * Reserve requirement
Required reserves = $65 million * 0.03 = $1.95 million
Thus,
The bank's required reserve level is $1.95 million.
Loans = Deposits - Required reserves - Excess reserves - Treasury securities
Loans = $65 million - $1.95 million - $2 million - $5 million
Loans = $56.05 million
So,
The quantity of loans this bank is able to make to the public is $56.05 million.
(b)
Calculate the effective reserve ratio -
Effective reserve ratio = [Required reserves + Excess reserves]/Deposits
ERR = [$1.95 million + $2 million]/$65 million
ERR = $3.95 million/$65 million
ERR = 0.06 or 6%
The effective reserve ratio is 6%.
Calculate the money multiplier -
Money multiplier = 1/Effective reserve ratio
Money multiplier = 1/0.06 = 16.67
The value of money multiplier is 16.67
(c)
Now, the Fed increases the required reserve ratio to 5%.
Deposits = $65 million
Reserve requirement = 5% or 0.05
Required reserves = Deposits * Reserve requirement
Required reserves = $65 million * 0.05 = $3.25 million
Thus,
The bank's new required reserve level is $3.25 million.
Loans = Deposits - Required reserves - Excess reserves - Treasury securities
Loans = $65 million - $3.25 million - $3 million - $6.5 million
Loans = $52.25 million
So,
The quantity of new loans this bank is able to make to the public is $52.25 million.
(d)
Calculate the effective reserve ratio -
Effective reserve ratio = [Required reserves + Excess reserves]/Deposits
ERR = [$3.25 million + $3 million]/$65 million
ERR = $6.25 million/$65 million
ERR = 0.096 or 9.6%
The effective reserve ratio is 9.6%.
Calculate the money multiplier -
Money multiplier = 1/Effective reserve ratio
Money multiplier = 1/0.096 = 10.42
The new value of money multiplier is 10.42
The reserve requirement has been increased. This is done when central bank administer contractionary monetary policy.
So,
The change in the reserve requirement is an example of contractionary monetary policy.
Assets Liabilities Loans Deposits $65 million Required Reserves Excess Reserves $2 million Treasury Securities $5 million...
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