6. For the following questions, assume that the money multiplier-1/required rese

Question

6. For the following questions, assume that the money multiplier-1/required reserve ratio. A If the required reserve ratio is 10%, how much of a new $10,000 deposit can abank lend? B A bank currently holds $150,000 in excess reserves. If the current reserve requirement is C The trading desk at the Bank of Canada sold $100,000,000 in T- bills to the public. If What is the potential impact on the money supply? 12.5%, how much could the money supply change? How could this happen? the current reserve requirement is 8.0%, how much could the money supply change?

Explanation / Answer

Solution

A.

Reserve ratio is 10% ,so amount to be retained will be $10000 * 10% : $1000

Amount to lend : New deposit - Amount to be retained

: $10000 - $1000

   : $9000

Money supplier : 1/Reserve ratio

   : 1/10% = 10

Money supply will be Deposit * money supplier

   : $10000*10

   : $100000

B.

If bank lends its excess reserves ,money supply will increase.

Reserve ratio : 12.5%

Money multiplier : 1/12.5% = 8

If bank lends all reserves Money Supply will increase to : $150000 * 8

   $1200000

C

Reserve Ratio : 8%

Money Multiplier : 1/8% : 12.5

Sale of T-bills will decrease money supply : $100000000 * 12.5

:$1250000000

     

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