Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:Balance Sheet for Ecoville International BankASSETSLIABILITIESCash$33,000Demand Deposits$99,000Loans 66,000 Now assume that the Fed lowers the reserve requirement to 8%. If the Fed wanted to implement a contractionary monetary policy using reserve requirements, how would that work?

Demand deposits=$99,000The Fed has a 10% reserve requirementThis means bank can lend:99,000-10%(99,000)=99,000-9900=$$89,100Now,If the Fed lowers the reserve requirement to 8%Bank can lend=99,000-8%=$91,080 From the above analysis, we can say that If the Fed wanted to implement a contractionary monetary policy using reserve requirements then the bank should increase the reserve requirement instead of lowering it. In the above case, when the Fed reduces the reserve requirements from 10% to 8%, it leads to an increase in the money supply. Thus, it makes contractionary monetary policy ineffective because the aim of the contractionary monetary policy is to reduce the money supply.

Answered: Assume that the Bank of Ecoville has…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:

Balance Sheet for Ecoville International Bank
ASSETS	LIABILITIES
Cash	$33,000	Demand Deposits	$99,000
Loans	66,000

Now assume that the Fed lowers the reserve requirement to 8%.

If the Fed wanted to implement a contractionary monetary policy using reserve requirements, how would that work?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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Assume that the bank makes these loans. What will the new balance sheet look like?
By how much has the money supply increased or decreased?
If the money multiplier is 5, how much money will ultimately be created by this event?

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What is the maximum amount of new loans that this bank can make?

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