Chapter 10 Instructors Solutions Wor Math it Graph it Write it On a piece of not
ID: 1166929 • Letter: C
Question
Chapter 10 Instructors Solutions Wor Math it Graph it Write it On a piece of notebook paper, please use the following scenarios to answer the questions: AU. S. bank has $100,000.00 in deposits. This bank operates in a fractional reserve system here the FRB mandates a 10% required reserve. This bank has loaned out all excess reserves and is currently at the minimum requirement. Show all work. Construct a simple balance sheet for this bank. At the current required reserve ratio, how much do this bank's deposits impact the total money supply through the money multiplier? At a velocity of 2, how much does this bank's total creation of money impact nominal 1. 2. 3. 4 GDP? Let's say the FRB changes the reserve ratio to 20%. Repeat 1, 2, and 3 5. Calculate and describe the possible outcomes from such a change. Create an idealized ADAS model starting with an inflation gap, and show the possible outcome.Explanation / Answer
1) Deposits = $100,000 and reserve ratio = 10% or 0.1.
Therefore required reserves = 0.1*100000 = $10,000.
A simple balance sheet of the given example can be as follows:
Assets
$
Liabilities
$
Reserves
10,000
Deposits
100,000
Loans
90,000
Total
100,000
Total
100,000
2) Money multiplier = 1/0.1 = 10.
Therefore total money supply = $100,000 * 10 = $1,000,000 (M)
3) The velocity of money is given as v = 2. The equation of quantity theory of money states that MV = PY where M = money supply, v = velocity of money, P= Price level and Y= Real GDP.
The formula of real GDP = Nominal GDP/Price level or Y = Nominal GDP/P
Therefore Nominal GDP = PY.
Thus the right hand side of the quantity theory of money is the nominal GDP.
When M = $1,000,000 and v = 2, Nominal GDP = PY = $2,000,000
4) When the reserve ratio changes from 10% to 20%, it becomes 0.2. Therefore the whole problem changes and parts 1), 2) and 3) are repeated below:
Assets
$
Liabilities
$
Reserves
20,000
Deposits
100,000
Loans
80,000
Total
100,000
Total
100,000
Therefore total money supply = $100,000 * 20 = $2,000,000 (M)
Assets
$
Liabilities
$
Reserves
10,000
Deposits
100,000
Loans
90,000
Total
100,000
Total
100,000
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