he questions on this homework deal with an economy called Economica. This econom
ID: 1208621 • Letter: H
Question
he questions on this homework deal with an economy called Economica. This economy contains a total of two banks; I've included partial balance sheet information for each below. To avoid each question becoming huge, I won't repeat this information for future questions.
Bank One:
$1,500 cash within the bank
$3,000 Deposit in the Fed
$6,000 equity (capital)
$12,000 saving deposits
$16,000 checking deposits (DD)
Bank Two:
$2,000 cash within the bank
$3,500 Deposit in the Fed
$8,000 equity (capital)
$15,000 savings deposits
$20,000 checking deposits (DD)
Residents in this economy hold $6,000 in cash. The reserve requirement ratio is the same as we've used on all graded assignments.
You can safely assume that all banks must keep 10% of DD as required reserves.
Calculate the ACTUAL amount of new money all banks working together WILL create. Use Bank One's ER as a starting point. Carefully follow all numeric instructions. (For the purposes of this homework, though there are only two banks, we'll assume that's enough for the full, multiplied money creation process to work through.)
Explanation / Answer
Reserve Formulas Summary
1. Total Reserves = cash in vault + Deposits at Fed.
2. Required Reserves = RR x Liabilities
3. Excess Reserves = Total Reserves - Required Reserves
Total Change in Money Supply = initial excess reserves X money multiplier
money multiplier = 1/RR
Bank 1
Liabilities = 12000 + 6000 + 18000 = 34000
Assets = 1500 + 3000 = 4500
Required Reserve = 10% * 34000 = 3400
Total Reserve = 4500
Excess Reserve = 4500 - 3400 = 1100
Money Multiplier = 1 / 0.1 = 10
Total change in money supply = 1100 * 10 = 11000
Bank 2
Liabilities = 8000 +15000 + 20000 = 43000
Assets = 2000 + 3500 = 5500
Total Reserve = 5500
Reserve Requirement = 43000 * 0.10 = 4300
Excess Reserve = 5500 - 4300 = 1200
Total Change in Money supply = 1200 * 10 = 12000
Total Change by Bank 1 and Bank 2
11000 + 12000 = 23000
1. Total Reserves = cash in vault + Deposits at Fed.
2. Required Reserves = RR x Liabilities
3. Excess Reserves = Total Reserves - Required Reserves
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