1. First National Bank has the following: Cash Reserves of $100,000 Loans of Dep

Question

1. First National Bank has the following: Cash Reserves of $100,000 Loans of Deposits of $500,000 Assume the Federal Reserve has a reserve requirement of 5%. $400,000 (a) Prepare a T-account for the bank (b) Of the $100,000 in cash reserves, how much are required and how much are excess? (c) How much can First National Bank make in loans? (d) What is the money multiplier? (e) What is the maximum amount by which money supply in the economy can increase by as a result of First National Bank's loan?

Explanation / Answer

a)

b) reserve requirement is 5% .

therefere, required reserves = reserves * required reserve ratio

required reserves = 100000 *5/100 = $5000

excess reserves = reserves - required reserves

excess reserves = 100000 *5000 = $95000

C) Money multiplier = 1/ required reserve ratio

money multiplier = 1/ 5%

money mltiplier= 20

D) total loans = $95000

money supply = $95000 * 20 = $1900000

Assets Amount Liability Amount Reserves $100000 Deposit $500000 Loans $400000

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