Bank Balance Sheet Assets Liability and Equity Required Reserves: $ 0.30 million Deposits: $ 1.50 million Excess Reserves: $ 1.80 million Equity: $ 1.50 million Government Bonds: $ 0.90 million Remember, new money creation has a multiplier effect. That means that our desired $6 million increase in the money supply doesn't require us to buy a full $6 million in bonds from banks. Further, our analysis indicates that as long as banks in our economy can make loans, they will -- in other words, they won't choose to hold excess reserves instead of lending them out. Let's say we decide to transact with Typical Bank again, and remember that the required reserve ratio is 0.2. To increase the money supply by $6 million, how much should we increase Typical Bank's excess reserves?
Bank Balance Sheet Assets Liability and Equity Required Reserves: $ 0.30 million Deposits: $ 1.50 million Excess Reserves: $ 1.80 million Equity: $ 1.50 million Government Bonds: $ 0.90 million Remember, new money creation has a multiplier effect. That means that our desired $6 million increase in the money supply doesn't require us to buy a full $6 million in bonds from banks. Further, our analysis indicates that as long as banks in our economy can make loans, they will -- in other words, they won't choose to hold excess reserves instead of lending them out. Let's say we decide to transact with Typical Bank again, and remember that the required reserve ratio is 0.2. To increase the money supply by $6 million, how much should we increase Typical Bank's excess reserves?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Bank
|
Assets
|
Liability and Equity
|
|---|---|
|
|
Deposits: $ 1.50 million
|
|
Excess Reserves: $ 1.80 million
|
Equity: $ 1.50 million
|
|
Government Bonds: $ 0.90 million
|
Remember, new money creation has a multiplier effect. That means that our desired $6 million increase in the money supply doesn't require us to buy a full $6 million in bonds from banks.
Further, our analysis indicates that as long as banks in our economy can make loans, they will -- in other words, they won't choose to hold excess reserves instead of lending them out.
Let's say we decide to transact with Typical Bank again, and remember that the required reserve ratio is 0.2. To increase the money supply by $6 million, how much should we increase Typical Bank's excess reserves?
_____ million
Expert Solution
Step 1
Excess reserves:
The required reserve ratio of a bank depicts the minimum amount of deposits a bank must keep as reserves for the central bank. This legal minimum amount is set by the economy's CB.
Now, the excess reserve refers to the amount banks keep above the reserve ratio to never run out of cash.
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