Suppose the T-account (abbreviated balance sheet) for First National Bank is as

Question

Suppose the T-account (abbreviated balance sheet) for First National Bank is as follows: At the outset assume that all banks other than First National Hank maintain zero excess reserves and the Reserve Requirement is 10%. Answer the following questions using the initial account balances on First National Bank's balance sheet. Do not cumulate your answers, lies a balance sheet (T account) to show how account balances would change in each of the following situations. Include required reserves and excess reserves in your balance sheets. How much in excess reserves does First National now hold? By how much would the money supply change if First National, like all other banks decides to maintain zero excess reserves by making new loans? Suppose the l end purchases S50.000 of government bonds from First National Bank and First National maintains zero excess reserves. By how much would the money supply change as a result of this bond purchase and change in First National's excess reserve policy?

Explanation / Answer

a) Required reserve = 10% of $500,000 = $ 50,000

Actual reserves = $ 100,000

Excess reserves = Actual reserves - Required reserve = $ 100,000 - $ 50,000 = $ 50,000

b) Change in money supply = Change in reserves X money multiplier

Change in money supply = $ 50,000 X 1/10% = $ 50,000 X 10 = $ 500,000

c) When Fed purchases government securities then reserves of banks increases by $ 50,000.

Change in money supply = 50,000 X money multiplier = 50,000 X 1/10% = $ 500,000

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.