Given an initial deposit of $500, and assuming that the required reserve ratio equals 10%, and that bank customers do not hold any currency, fill out the following chart for three rounds of deposits. Round # Deposits Required Reserves Excess Reserves Loans 1 _____ _____ _____ _____ 2 _____ _____ _____ _____ 3 _____ _____ _____ _____ Fill out the table above. What is the amount of required reserves in round #2? What is the amount loaned out by this bank in round #3? What is the value of the “oversimplified” money multiplier? If the money creation process continues to its limit, by how much will the money supply ultimately change? (Hint: Use the money multiplier process formula to answer this question.)

Required reserve is minimum amount that a commercial bank must hold in liquid assets in order to fulfill central bank regulations.Excess reserves are amount of total deposits that commercial banks can hold as reserves or loaned out.The required reserve=Required reserve ratio* depositExcess reserve=Deposit - Required reserveWhen banks doesn't hold any excess reserves, loans is equal to excess reserves.Loans = Excess ReserveThe deposit on next successive round is equal to loans of previous round.Required reserve excess reserves loans deposit 504504505004540540545040.5364.5364.5405Required reserve in round #2 is $45.The amount loaned out in round #3 is $364.5Money multiplier is a variable that tells how much money supply changes due to $1 change in initial deposit.Money multiplier= 1 /reserve ratioMoney multiplier= 1/0.1=10 Change in initial deposit= $500Change in money supply=$500*10=$50001)Required reserve excess reserves loans deposit 504504505004540540545040.5364.5364.54052) required reserve in #2=$453) Loan in #3=364.5 4) Multiplier= 105) Change in money supply=$5000

Answered: Given an initial deposit of $500, and…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Given an initial deposit of $500, and assuming that the required reserve ratio equals 10%, and that bank customers do not hold any currency, fill out the following chart for three rounds of deposits.

Round # Deposits Required Reserves Excess Reserves Loans

1 _____ _____ _____ _____

2 _____ _____ _____ _____

3 _____ _____ _____ _____

Fill out the table above.

What is the amount of required reserves in round #2?

What is the amount loaned out by this bank in round #3?

What is the value of the “oversimplified” money multiplier?

If the money creation process continues to its limit, by how much will the money supply ultimately change? (Hint: Use the money multiplier process formula to answer this question.)

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