Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Chapter 28, Problem 1TY
To determine
The effect of a new deposit of $12 million on the money supply in an economy, where the
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Suppose banks keep no excess reserves and no individuals or firms hold on to cash. If someone suddenly discovers $12 million in buried treasure and deposits it in a bank, explain what will happen to the money supply if required reserve ratio is 10 percent.
The task I am struggling with:
Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank. The reserve ratio is 10%.
a) how dies the deposit initially change the T-account of the local bank? How does it change the money supply?
b) If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit?
c) if every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy´s initial cash deposit of $500?
Thank you very much for your help.
Jane deposits $175 into her bank, and the reserve requirement is 15 percent. How much is the excess reserve in dollars
Chapter 28 Solutions
Economics: Principles & Policy
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Similar questions
- Suppose the money supply is currently $500 billion and the Fed wishes to increases it by $100 billion. Given a required reserve ration of 0.25, what should it do? If it decided to change the money supply by changing the required reserve ratio, what change should it make? Why may the Fed be reluctant to change the reserve requirement?arrow_forwardSuppose Adrienne receives a payment in cash of $400 and she deposits it in a bank. i. If the banking system is 100 percent reserve, how does the money supply change? i. If the reserve requirement is 10 percent and the bank holds no excess reserve, how does the money supply change? in. If the reserve requirement is 10 percent and the bank holds an excess reserve of 2 percent, how does the money supply change? iv. Now suppose the reserve ratio is 25 percent. How much money can be created from $100 of reserves? Show your work.arrow_forwardIf banks have a required reserve ratio of 25%, and one bank is currently holding $10,000 in excess reserves, what would be the maximum possible change to the money supply if the bank loans out all of the excess reserves?arrow_forward
- Suppose you found Rs. 2000 that was stored under your grandmother's mattress and you decided to deposit this money in a Bank of India. If the desired reserve ratio were 20 percent and all excess reserves were lent out. a) Calculate the money supply created by this deposition in the economy?b) Following a new deposit of Rs. 2000, what is the reserve requirement of the commercial bank?c) Suppose all the banks in the banking system collectively have Rs.20 million in cash reserves and have a desired reserve ratio of 20 percent, the maximum amount of demand deposits the banking system can support is?arrow_forwardYou just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 20%, how much will your deposit increase the total value of checkable bank deposits? If the reserve requirement is 8%, how much will your deposit increase the total value of checkable deposits? Increasing the reserve requirement decreases the money supply. %24 %24arrow_forwardSuppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve requirement is 5%. What is the maximum possible increase in the money supply as a result of your bank deposit? maximum increase: $ Which events could cause the increase in the money supply to be less than its potential? Banks choose to loan out all excess reserves. Some loan recipients choose to hold some cash instead of depositing all of it in banks. Banks decide to keep some excess reserves on hand. All money loaned out is deposited back into the banking system.arrow_forward
- Suppose that your bank's reserve ratio is 0.2 and you deposit $50,000 into the bank. Assume that the bank loans out the maximum amount it can, and people deposit all their money. What is the deposit multiplier? What is the total increase in deposits in the banking system? What is the change in the money supply?arrow_forwardBanks have a reserve ratio of 20%, and households deposit all cash into the banking system. How many dollars should the Fed print in order to increase the money supply by $7,000,000?arrow_forwardThe Fed conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what are the largest and smallest possible increases in the money supply that could result? Explain.arrow_forward
- Suppose banks increase excess reserves by $574,207. If the reserve ratio is 6%, what is the maximum increase in the money supply?arrow_forwardA reserve requirement of 10 percent means a bank must have at least $300 of reserves if its Checkable deposits arearrow_forwardDiscuss how a decrease in the required reserve ration increases the money supply.arrow_forward
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