(a.) (20 points) Third National Bank is fully loaned up with reserves of $20,000
ID: 1184630 • Letter: #
Question
(a.) (20 points) Third National Bank is fully loaned up with reserves of $20,000 and demand deposits equal to $100,000. The reserve ratio is 20%. Households deposit $5,000 in currency into the bank. How many excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work. (b.) (20 points) what is the discount rate in the banking system? Explain how the Fed manipulates this rate to achieve macroeconomic objectives.Explanation / Answer
20/100 X 12500 = $25000
excess reserves with the bank
= $125000-$25000
= $100000
credit created with the amount of reserves
= 100/20 X 100000
= $200000000
formula used for calculating credit generated
= 1/required reserve ratio X initial deposit
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