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5. Assume that $1,000 is deposited in the bank, and that each bank loans out all of its excess reserves. For each of the following required reserve ratios, calculate the amount that the bank must hold in required reserves, the amount that will be excess reserves, the deposit expansion multiplier and the maximum amount that the money supply could increase. Required Reserve Ratio 1% 5% 10% 12.5% 15% 25% Required reserves Excess reserves Deposit expansion multiplier Maximum increase in the money supply

5. Assume that $1,000 is deposited in the bank, and that each bank loans out all of its excess reserves. For each of the following required reserve ratios, calculate the amount that the bank must hold in required reserves, the amount that will be excess reserves, the deposit expansion multiplier and the maximum amount that the money supply could increase. Required Reserve Ratio 1% 5% 10% 12.5% 15% 25% Required reserves Excess reserves Deposit expansion multiplier Maximum increase in the money supply

ECON MACRO
ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter14: Banking And The Money Supply
Section: Chapter Questions
Problem 3.4P
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UNIT 4 Macroeconomics LESSON 3 I ACTIVITY 37 (contimusd) 5. Assume that $1,000 is deposited in the bank, and that each bank loans out all of its excess reserves. For each of the following required reserve ratios, calculate the amount that the bank must hold in required reserves, the amount that will be excess reserves, the deposit expansion multiplier and the maximum amount that the money supply could increase. Required Reserve Ratio 1% 5% 10% 12.5% 15% 25% Required reserves Excess reserves Deposit expansion multiplier Maximum increase in the money supply 6. If the required reserve ratio were 0 percent, then money supply expansion would be infinite. Why don't we want an infinite growth of the money supply? (Hint: remember the equation of exchange: MV = PQ.) 7. If the Federal Reserve wants to increase the money supply, should it raise or lower the reserve requirement? Why? 8. If the Federal Reserve increases the reserve requirement and velocity remains stable, what wil happen to nominal GDP? Why? 9. What economic goal might the Federal Reserve try to meet by reducing the money supply? 10. Why might the money supply not expand by the amount predicted by the deposit expansion multiplier? 198 Advanced Placement Economics Macroeconomics: Student Activities O National Council on Economic Education, New York, N.Y.
Transcribed Image Text:UNIT 4 Macroeconomics LESSON 3 I ACTIVITY 37 (contimusd) 5. Assume that $1,000 is deposited in the bank, and that each bank loans out all of its excess reserves. For each of the following required reserve ratios, calculate the amount that the bank must hold in required reserves, the amount that will be excess reserves, the deposit expansion multiplier and the maximum amount that the money supply could increase. Required Reserve Ratio 1% 5% 10% 12.5% 15% 25% Required reserves Excess reserves Deposit expansion multiplier Maximum increase in the money supply 6. If the required reserve ratio were 0 percent, then money supply expansion would be infinite. Why don't we want an infinite growth of the money supply? (Hint: remember the equation of exchange: MV = PQ.) 7. If the Federal Reserve wants to increase the money supply, should it raise or lower the reserve requirement? Why? 8. If the Federal Reserve increases the reserve requirement and velocity remains stable, what wil happen to nominal GDP? Why? 9. What economic goal might the Federal Reserve try to meet by reducing the money supply? 10. Why might the money supply not expand by the amount predicted by the deposit expansion multiplier? 198 Advanced Placement Economics Macroeconomics: Student Activities O National Council on Economic Education, New York, N.Y.
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