Explanation The banks are the financial institutions that accept the deposits from the people and provide the loans to the public. Thus, the banks are the creators of money in the economy. The FED is the central bank of the US economy that regulates the commercial banks and the money supply. The FED controls the commercial banks through the Required Reserve Ratio. The Required Reserve Ratio is the ratio of the deposits that the banks have to keep with them in the form of money without using for providing the loans. The money multiplier is the total change in the money supply in the economy due to an initial change in the money with the banks. Option (d): The money multiplier in the economy can be calculated by dividing 1 with the Required Reserve Ratio. Here, the Required Reserve Ratio is given to be 20 percent, and thus, the money multiplier value can be calculated as follows: Money multiplier = 1 Required Reserve Ratio = 1 0.20 = 5 The value of the money multiplier is calculated to be 5. Hence, at first, the bank will be able to lend out 8,000, which is its excess reserve , and there will be 5 times increase in the economy, which will be equal to $40,000

The new money supply in the economy.

MACROECONOMICS FOR TODAY

10th Edition

ISBN: 9781337613057

Author: Tucker

Publisher: CENGAGE L

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Chapter 15, Problem 15SQ

To determine

The new money supply in the economy.

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Similar questions

Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money, and they deposit all their money in Humongous Bank. Humongous Bank decides on a policy of holding 100 reserves. Draw a T-account for the bank. Humongous Bank is required to hold 5 of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original 19 million loan?
Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Acme Bank. Sketch out the balance sheet changes that will occur as Acme restores its required reserves (10% of deposits) by reducing its loans. The initial balance sheet for Acme Bank contains the following information: Assets - reserves 30, bonds 50, and loans 250; Liabilities - deposits 300 and equity 30.
If the central bank sells 500 in bonds to a bank that has issued 10,000 in loans and is exactly meeting the reserve requirement of 10, what will happen to the amount of loans and to the money supply in general?

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