Changes in Monetary Policy Prepare a 2-3 page analysis by answering the question
ID: 1167676 • Letter: C
Question
Changes in Monetary Policy
Prepare a 2-3 page analysis by answering the questions below. Be sure to cite your references using APA format.
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
Balance Sheet for Ecoville International Bank
ASSETS
LIABILITIES
Cash
$33,000
Demand Deposits
$99,000
Loans
66,000
Required:
Now assume that the Fed lowers the reserve requirement to 8%.
1- What is the maximum amount of new loans that this bank can make?
2- Assume that the bank makes these loans. What will the new balance sheet look like?
3- By how much has the money supply increased or decreased?
4- If the money multiplier is 5, how much money will ultimately be created by this event?
5- If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?
Deliverables:
Address the questions above, showing your calculations. Develop your analysis in Microsoft Excel format. Enter non-numerical responses in the same worksheet using textboxes.
Balance Sheet for Ecoville International Bank
ASSETS
LIABILITIES
Cash
$33,000
Demand Deposits
$99,000
Loans
66,000
Explanation / Answer
(1) Maximum amount of new loans = Demand deposit x (1 - reserve ratio)
= $99,000 x (1 - 0.08)
= $91,080
(2)
Once the bank makes this loan, new balance sheet will be:
ASSETS
LIABILITIES
Cash
$33,000
Demand Deposits
$99,000
Loans
$157,080
(3)
Increase in money supply solely created by this bank equals increase in loans made, that is, $91,080.
(4) If money multiplier is 5, total increase in money supply in economy = increase in loan made x money multiplier
= $91,080 x 5 = $455,400
(5) Contractionary policy using reserve ratio will make Fed increase the reserve ratio. The higher the reserve ratio, the lower amount banks can make out from new deposits & the lower the total incraese in money supply in economy.
ASSETS
LIABILITIES
Cash
$33,000
Demand Deposits
$99,000
Loans
$157,080
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