Given an initial deposit of $500, and assuming that required reserves equal 15%,

Question

Given an initial deposit of $500, and assuming that required reserves equal 15%, and that bank customers do not hold any currency, fill out the following chart for three rounds of deposits. What is the amount of required reserves in Round #2? What is the amount loaned out by this bank in Round #3? What is the value of the "oversimplified" money multiplier? If the money creation process continues to its limit, by how much will the money supply ultimately change? If the above bank borrowed $1000 from the Fed, by how much more could it increase its loans to customers?

Explanation / Answer

Following is the complete table -

Q6. The amount of required reserves in Round 2 $63.75.

Q7. The amount loaned out by this bank in Round 3 is $307.06.

Q8. Calculate value of "oversimplified" money multiplier -

Money Multiplier = 1/RR = 1/0.15 = 6.67

The value of "Oversimplified" money multiplier is 6.67.

Q9. Calculate Total change in money supply -

Increase in money supply = Initial deposit * Money Multiplier

                                         = $500 * 6.67

                                        = $3,335

The money supply will increase by $3,335.

Round Deposits Required Reserves Excess Reserves Loans 1 $500 $500 * 0.15 = $75 $500 - $75 = $425 $425 2 $425 $425 * 0.15 = $63.75 $425 - $63.75 = $361.25 $361.25 3 $361.25 $361.25 * 0.15 = $54.19 $361.25 - $54.19 = $307.06 $307.06

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