Suppose that the first commercial bank has received an initial deposit of $5,000. Assume that there is no currency in circulation, while the reserve requirement ratio is set at 10%. a. What is the minimum reserve and the excess reserve of the bank? Show it in a T-account. b. If the first bank holds half of its excess reserve and loan out the other half, show the new T-account of the bank. c. Suppose that the loan from the first bank is deposited by the borrowers in the second bank. If the second bank does not lend the fund, do you think money supply will increase or not? Show the final T-account of both banks and the change in money supply after the loan is made.
Suppose that the first commercial bank has received an initial deposit of $5,000. Assume that there is no currency in circulation, while the reserve requirement ratio is set at 10%. a. What is the minimum reserve and the excess reserve of the bank? Show it in a T-account. b. If the first bank holds half of its excess reserve and loan out the other half, show the new T-account of the bank. c. Suppose that the loan from the first bank is deposited by the borrowers in the second bank. If the second bank does not lend the fund, do you think money supply will increase or not? Show the final T-account of both banks and the change in money supply after the loan is made.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that the first commercial bank has received an initial deposit of
$5,000. Assume that there is no currency in circulation, while the reserve
requirement ratio is set at 10%.
a. What is the minimum reserve and the excess reserve of the bank? Show it
in a T-account.
b. If the first bank holds half of its excess reserve and loan out the other half,
show the new T-account of the bank.
c. Suppose that the loan from the first bank is deposited by the borrowers in
the second bank. If the second bank does not lend the fund, do you think
money supply will increase or not? Show the final T-account of both banks
and the change in money supply after the loan is made.
d. Do you think the total reserves in the banking sector change? If now there
are many banks in the economy, what will be the maximum money supply
that can be created from the initial deposits of $5,000?
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