Given an initial deposit of $500, and assuming that required reserves equal 15%.
ID: 1207723 • Letter: G
Question
Given an initial deposit of $500, and assuming that required reserves equal 15%. and that bank customers do not hold any currency, fill out the following chart for three rounds of deposits. What is the amount of required reserv es in Round #2? What is the amount loaned out by this bank in Round #3? What is the value of the "oversimplified" money multiplier? If the money creation process continues to its limit, by how much will the money supply ultimately change? If the above bank borrowed $1,000 from the Fed. by how much more could it increase its loans to customers?Explanation / Answer
Working notes:
(1) Required reserve = Deposit x Required reserve ratio
(2) Excess reserve = Deposit - Required reserve
(3) Loan = Excess reserve at every round
(4) Deposit at round (N + 1) = Loan (Excess reserve) at round N
Following table:
Round Deposit Required reserve Excess reserve Loan
1 500 75 425 425
2 425 63.75 361.25 361.25
3 361.25 54.19 307.06 307.06
(6) $63.75
(7) $307.06
(8) Money multiplier (MM) = 1 / Required reserve ratio = 1 / 0.15 = 6.67
(9) Total change in money supply = Initial deposit x MM = $500 x 6.67 = $3,333.33
Note: First 4 questions are answered.
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