1. suppose the required reserve ratio is 20%. if the fed creates $100 in bank re
ID: 1108537 • Letter: 1
Question
1. suppose the required reserve ratio is 20%. if the fed creates $100 in bank reserves, and the bank loan out the maximum each time and each borrower takes every loan in the form of a checking account, how much will the MONEY SUPPLY INCREASE?
2. Suppose the required reserved ratio is 20%. If the fed creates $100 in bank reserves, and the banks loan out the maximum each time and the first borrower takes the loan in form of cash which they walk out the door with, how much will the MONEY SUPPLY INCREASE?
3. You tell your friend that in Macroeconomics today you learn that someone can have much money. Your friend say that is crazy, no one can have too much money. Explain to your friend how, yes, someone can have too much money?
Explanation / Answer
1.The reserve ratio is 20%, or $100 which means that the chequing deposits increased by 100*100/20 = $500
The loaned out funds will equal = 500-100 = $400
Money supply will increase by 1/0.20*400=2000
2.
The money supply will only increase by the cash amount first borrower and not deposited in bank.
SO money supply will increase by only $400, the amount of loan to 1st borrower.
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