1. Following the balance sheet for The First National Bank (4 points) The First
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Question
1. Following the balance sheet for The First National Bank (4 points)
The First National Bank
Assets Liabilities
Total reserves: ________ Deposits: $500,000
Required reserves: $20,000
Excess reserves: $80,000
Loans: $ 400,000
Total Assets: $500,000 Total liabilities $500,000
a. What is the required reserve ratio? Show your calculation
b. What are the bank’s total reserves? Show your calculation
c. How much can the First National Bank safely lend out? Show your calculation
d. What is the size of the simple money (deposit) multiplier? What does it tell us?
e. By how much will the banking system be able to expand the money supply?
Explanation / Answer
(a) Required reserve ratio (RR) = Required reserves / Deposits
= $20,000 / $500,000 = 0.04 = 4%
(b) Total reserve = Required reserve + Excess reserve
= $(20,000 + 80,000) = $100,000
(c) Bank can lend its excess reserves equal to $80,000.
(d) Money multiplier (MM) = 1 / RR = 1 / 0.04 = 25
This means that with every additional $1 new deposit created in the banking system, total money supply in economy increases by $25.
(e) Total expansion in money supply = Deposit x MM = $500,000 x 25 = $12,500,000
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