The following is a bank\'s balance sheet (in millions of dollars). What are the

Question

The following is a bank's balance sheet (in millions of dollars). What are the bank's actual reserves? Show your computation. Assume that the required reserve ratio is 10 percent. What are the bank's required reserves? Show your computation. What are the bank's excess reserves? Show your computation. Assume that all other banks begin with zero excess reserves. Now this bank lends out the entirety of its excess reserves, and, as the lending-deposit process enfolds, other banks also lend out all excess reserves. What is the increase in the money supply? Show your computation and explain your answer.

Explanation / Answer

All amounts in millions of $ 1. The bank's actual reserves are 9 (Vault Cash + Deposits at Fed) million $ 2. The bank's required reserves are 10% of Checking Deposits of 30 million = $ 3 million 3. The bank's excess reserves are $ 6 million. 4. If the bank lends out $ 6 million of its excess reserves, it is compensated by other banks lending out $ 3 million of their excess reserves. This leads to an increase in money supply by $ 3 million.

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