For each of the following transactions, assume the bank has initial demand depos
ID: 1255335 • Letter: F
Question
For each of the following transactions, assume the bank has initial demand deposits of $100,000 and the reserve requirement is 5%.A. Identify the current required reserves and excess reserves. Explain.
B. If the bank decides to hold $30,000 in reserves, what is the maximum amount of money that can be created? Explain.
C. Instead of transaction B (above), assume the Federal Reserve buys $50,000 worth of securities from the bank, what is the maximum amount of money that can be created by this single transaction? Explain.
Explanation / Answer
A. If the initial demand deposits are $100,000, the bank is required to hold $5,000 of that money to fulfill the 5% reserve requirement. The remaining $95,000 are excess reserves, because they can be loaned out instead. B. If the bank holds $30,000 in reserves, it has $70,000 that it can loan out; thus, the maximum amount of money that can be created is $70,000. C. If the Federal Reserve buys $50,000 worth of securities, then the bank is infused with an extra $50,000 of excess cash, and can then loan out the $50,000; thus, the maximum amount of money that can be created by this single transaction is $50,000. Hope this helps!
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