(a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits

Question

(a.) Reserve requirement for banks is set at 5%. Your firm deposits its profits of $28,000 into the Third National Bank. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

How much excess reserve does your deposit generate for the bank?

What is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.

(b.) What is the Federal Funds Rate in the banking system?                                                    

Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.

Explanation / Answer

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