(a)
To compute:
The maximum increase in the money supply, if the reserve requirement is
Answer to Problem 15E
If the reserve requirement is
Explanation of Solution
Given information:
The banking system has vault cash of
As in the
Total liabilities are of $10,000.
Calculation for increase in money supply:
Working Note:
Calculation for the required reserve:
Calculation for the excess reserve by calculating total legal reserve:
Now, calculation of excess reserve:
Calculation for the deposit expansion multiplier:
It refers to a certain amount of cash from the deposit that a bank needs to keep according to the guidelines of the central bank.
Required reserve is calculated by,
Here, RR is reserve, r is percentage of required reserve and D is the total amount in deposits.
Excess reserve:
It refers to the amount left after separating the required reserve ratio of the financial institution.
(b)
To compute:
The
Answer to Problem 15E
The excess reserve of the banking system after Fed buys $100 bonds $900.
The maximum increase in money supply after the Fed buys $100 bonds is $4,500.
Explanation of Solution
Given information:
The banking system has vault cash of
According to the given information, the change in balance sheet after the Fed buys the
| Particulars | Amount ($) | Particulars | Amount ($) |
| Vault Cash | Demand deposits | ||
| Deposit in Fed | $2,000 | ||
| Bonds | $100 | ||
| Loan | |||
| Total |
Table (1)
Calculation for excess reserve:
Therefore, the excess reserve would be $900.
Calculation for increase in money supply:
The maximum increase in money supply after the Fed buys
Working Note:
Calculation for the required reserve.
Calculation of the excess reserve by determining total legal reserve.
To calculate maximum increase in the money supply, calculate the deposit expansion multiplier.
Required reserve:
It refers to the certain amount of cash from the deposit that a bank needs to keep according to the guidelines of the central bank.
Required reserve is calculated by,
Here, RR is reserve, r is percentage of required reserve and D is the total amount in deposits.
Excess reserve:
It refers to the amount left after separating the required reserve ratio of the financial institution.
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Chapter 13 Solutions
Macroeconomics (MindTap Course List)
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