11. If the reserve ratio is 5 percent, then $1,000 of additional reserves can cr

Question

11. If the reserve ratio is 5 percent, then $1,000 of additional reserves can create up to
       $200 of new money.
       $2,000 of new money.
       $20,000 of new money.
       None of the above is correct.

Small time deposits

$1,300 billion

Demand deposits and other checkable deposits

$600 billion

Savings deposits

$1,500 billion

Money market mutual funds

$1,200 billion

Traveler's checks

$50 billion

Large time deposits

$1,200 billion

Currency

$200 billion

Miscellaneous categories in M2

$50 billion

Assets

Liabilities

Reserves              $750

Deposits          $10,000

Loans                  9,250

       $64 of new reserves.
       $448 of new reserves.
       $700 of new reserves.
       $800 of new reserves.

Question 12. 12. Given the following information, what are the values of M1 and M2?

Small time deposits

$1,300 billion

Demand deposits and other checkable deposits

$600 billion

Savings deposits

$1,500 billion

Money market mutual funds

$1,200 billion

Traveler's checks

$50 billion

Large time deposits

$1,200 billion

Currency

$200 billion

Miscellaneous categories in M2

$50 billion

       M1 = $800 billion, M2 = $4,950 billion.
       M1 = $250 billion, M2 = $6,050 billion.
       M1 = $850 billion, M2 = $4, 900 billion.
       M1 = $850 billion, M2 = $6,100 billion.

Explanation / Answer

Q.11. If the reserve ratio is 5 percent, then $1,000 of additional reserves can create up to " $20,000 of new money."

Q.12. M1 = Demand deposits and other checkable deposits + Currency + Traveller's cheques = 600 + 200 + 50 = $850

and M2 =

the values of M1 and M2 are M1 = $850 billion, M2 = $4, 900 billion.

Q.13. Reserve is made out of deposit and the rest is acailable for loan.

If reserve = $750 and deposit = $10,000

then reserve ratio = 750/10,000 * 100 = 7.5%

Q.14  If the reserve requirement is 5 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $400, it "will be able to use this deposit to make new loans amounting to $380."

Because required reserve = reserved requirement percent * deposit = 5% * 400 = 20

excess reserve = deposit - reserve requirement = 400 -20 = 380

As it does not want to hold 380 it will give out 380 as loan.

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