A bank currently has $70,000 in transaction deposits, $6,000 in cash in the vault, $12,000 on deposit with the Fed, and $7,000 in government securities. The required reserve ratio is 20 percent. Answer these questions:
1) What is the maximum amount the money supply can increase, assuming this bank is the only bank in the system that has excess reserves? You need to know how to calculate actual reserves, required reserves, excess reserves, and the money multiplier to solve this problem. All these definitions are in your text, on or about page page 335 in your text.
2) An individual deposits a $750,000 check into the bank. That individual had just converted foreign currency into dollars so the $750,000 was not in the money supply before the deposit. What is the maximum size loan the bank can make once the check clears?
3) What is the maximum amount the money supply can increase as a result of the $750,000 deposit?
4) If these expansions in the money supply happen, what effect will it have on aggregate demand, GDP, and employment?
5) What could keep the expansions from happening? (Assume no policy changes.)
Sample Solution
