2. If an initial increase in excess reserves of $20,000 can generate a maximum i

Question

2. If an initial increase in excess reserves of $20,000 can generate a maximum increase in the money supply of $80,000, the required reserve ratio must be a. 4% b. 10%. c. 20%. d. 25%. 3. Assume that an individual makes a deposit of $2000 in a bank. How much loans can be made in the banking system because of this deposit if the reserve requirement is 5%? a. $2,000 b. S$100 c. $40,000 d. $38,000 4. Assume that there are no excess reserves in the banking sysuem when the reserve requirement is 20%. The purchase by the Fed of S 10,000 in US government securities from Academy a nk has the potential of ulrimately increasing the money supply by a total of b. $10,000 c. $50,000 d. $40,000 5. Assume that the Fed sells a bank $10,000 in U s overnment securities and thé reuerve requirement is 10%. This action immediately a. decreases the bank's reserves by $10,000 b. decreases the bank's reserves by $100,000 c. decreases the bank's reserves by $1,000 d. increases the bank's reserves by $100,000

Explanation / Answer

2) money multipler=1/rr

80000/2000=1/rr

1/rr= 4

rr=25% (d).

3) loan = 20000.0.05= 1000 (b)

4) The required reserves are= 20000* 0.05=2000

So the bank's keep reserve of $2000 and money supply increases by $8000. (a)

5) Selling the securities decreases the bank's reserves by $10000. (a)

4) The purchase will lead to increase in money supply by

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