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
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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F73e83d85-adf0-4a16-8844-409700f26c2c%2F9432f3d7-072e-4d60-afe4-2a4644ea324c%2F7rjkufe_processed.jpeg&w=3840&q=75)
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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