suppose that the reserve ratio is .25 and that a bank has actual reserves of $15
ID: 1095980 • Letter: S
Question
suppose that the reserve ratio is .25 and that a bank has actual reserves of $15,000 loans of $40000 and demand deposits of $50000
A. Excess reserves are $____________________.
B. This bank, being a single bank in a multibank system, can safely lend $____________________.
C. The multibank system can safely lend $__________________.
D. It is possible for the monetary base to increase by a total of $___________________. Assume now that the Fed lowers the reserve ratio to .20:
E. This bank, being a single bank in a multibank system, can now safely lend $_____________________.
F. The multibank system can safely lend $____________________.
G. It is now possible for the monetary base to increase by a total of $________________________.
H. The increase/decrease in the potential money supply because of the decrease in the required reserve ratio is $_____________________.
Explanation / Answer
A.
Because “excess” means any amount held beyond the required reserve ratio, the excess in this case is:
50000 x .25 = 12500; 15000 – 12500 = **2,500**
B.
Lending is limited eventually by the amount of sheer capital the bank possesses; however, safe lending requires an inclusion of the required amounts in reserve. That means they can only safely loan out what they’re not required to have on hand, and since they’re required to have the $50,000 and the $12,500 in reserve, that means they can only loan out the excess reserves: **2,500**.
C.
Because lending is limited in the same manner objectively, regardless of being a single bank or multibank system, the criteria are still the same. That means, if we are to assume this “bank” is now a “multibank system,” unless there’s additional information missing from the question above, the answer is also the same as (B): **$2,500**.
D.
The monetary base equals the total of the amount of money out in the public (loaned and/or circulated) and the amount the bank holds in deposits and reserves. This means the current monetary base is 15000 + 40000 + 50000 = 105,000. However, this question is also curious as to the potential increase of that base. So we have to look at how much could be additionally circulated. This means using the amount that could be safely loaned out, from prior questions, and thus it can only increase by **$2,500**.
Assume now that the Fed lowers the reserve ratio to .20:
E
Given the explanation for (A) above, we can work this out much the same way:
50,000 x .2 = 10,000; 15,000 – 10,000 = **$5,000**
F.
Given the explanation for (B) above, that means, again, **$5,000**.
G.
Given the explanation for (B), (C) and (F) above, once again that yields **$5,000**.
H.
Given that (A) through (D) equaled $2,500 and (E) through (G) now equal $5,000:
5000 – 2500 = **$2,500**.
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