Am i correct (a)When the bank reserve requirements changes, which of the followi
ID: 1248290 • Letter: A
Question
Am i correct(a)When the bank reserve requirements changes, which of the following will change for an individual banks
(answer "change' or "no change")
Transaction Depositis no change
Total reserves change
Required reserves change
Excess reserves change
Lending capacity change
(b) When the reserve requirements changes, which of the following will change in the total banking system?
Transaction Depositis change
Total reserves no change
Required reserves no change
Excess reserves no change
Lending capacity change
Explanation / Answer
(a)When the bank reserve requirements changes, which of the following will change for an individual banks
(answer "change' or "no change")
Transaction Depositis: no change
Demand deposits, negotiable order of withdrawl accounts and other highly liquid funds.
For an individual bank the effect of reserve requirement is very low on transaction deposits.
Total reserves: no change.
Total reserves are the cash kept in the vault of the bank, it is equal to total checkable deposits when there is no lending.
So, total reserve dosent change.
For example: A bank has a checkable deposits of $100.
The total cash reserves it has is $100.
If the reserve requirement is 10%.
We can split the total reserves as $10 required reserves and $90 excess reserves.
If the reserve requirement changes to 15% than the reserves has to be taken from $100 only.
So, rewuired reserves now is $15 and excess reserve is $85, total reserve is $100
Required reserves: change: Yes
Excess reserves: change: Yes
Lending capacity: change :Yes
If thereserve requirement changes, from the abovew example, from 10% to 5% than
the required reserves is $5 and excess reserve are $ 95, so $95 is available for lending, previously $95 is available.
(b) When the reserve requirements changes, which of the following will change in the total banking system?
For example if the reserve requirement decreases there will be excess reserves available for lending, if the bnak chooses to lend it
Transaction Depositis change, Yes
Demand deposits, negotiable order of withdrawl accounts and other highly liquid funds.
A change in reserve requirement will create excess money in the market due to money multiplier effect, this money is transatcted in the market in the form of Demand deposits, negotiable order of withdrawl accounts and other highly liquid funds.
MUltiplier effect:
Money multiplier= 1/ reserve requirement
if RR= 10
than multiplier= 1/0.1
=10
Now Maximum transaction deposist created in the banking system= 10 x excess reserves
Due to change in reserve requirement, if there is $100 is available as excess reserve than the banking syustem as a whole creates, 10x 100= $1000 transaction deposits.
Total reserves change
There will be a change in transaction deposits, this implies a change in total reserves.
Required reserves change: if reserve requirement changes, obviously there will be a change in required reserves
Excess reserves change: change in reserve requiremnets changes transaction deposits which changes the excess reserves, change in excess reserve changes the lending capability of the banking system.
Lending capacity change
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