3.1 Suppose Bank A, which faces a reserve requirement of 10 percent, receives a

Question

3.1 Suppose Bank A, which faces a reserve requirement of 10 percent, receives a $1000 deposit from costumer.

A. Assuming that it wishes to hold no excess reserves, determine how much bank should lend. Show your answer on bank balance sheet.
B. Assuming that the loan shown in Bank A’s balance sheet redeposit in Bank B’s balance, show the changes in Bank B’s balance sheet if lend out the maximum possible.
C. Repeat this process for three additional banks: C, D, and E.
D. Using the simple money multiplier, calculates the total change in the money supply resulting from the $1000 initial deposit.
E. Assume bank A, B, C, D, and E each wish to hold 5 percent excess reserve. How would holding this level of excess reserves affect the total change in money supply?

Explanation / Answer

faces a reserve requirement of 10 percent, receives a $1000 deposit from costumer. a)10% of 1000 will be kept as reserve =100 so at max the bank will lend a loan of 900 b) loan shown in Bank A’s balance sheet redeposit in Bank B’s balance, show the changes in Bank B’s balance sheet if lend out the maximum possible. bank b will keep the amount which are its reserves then lend the amount left as loan similarly for the other three banks e)bank A, B, C, D, and E each wish to hold 5 percent excess reserve. it will affect the amount which is to be given as loan .. now for bnk a amount that can be credited to loan starts from $995 .

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