Exploring Economics
Exploring Economics
8th Edition
ISBN: 9781544336329
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
Question
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Chapter 25, Problem 13P
To determine

(a)

To compute:

The excess reserve created by the deposit of $100,000 for the given reserve requirements.

Expert Solution
Check Mark

Answer to Problem 13P

The required reserve created by$100,000 if the bank faces the given reserve requirement is as shown below:

    10percent$10,000
    20percent$20,000
    25percent$25,000
    50percent$50,000

Explanation of Solution

The required reserve created by $100,000 if the bank faces the requirement of reserve ratio of 10%:

  RequiredReserve=Reserveratio×Deposits=0.1×100,000=$10,000

The required reserve created by$100,000if the bank faces the requirement of reserve ratio of 20%:

  RequiredReserve=Reserveratio×Deposits=0.2×$100,000=$20,000

The required reserve created by$100,000 if the bank faces the requirement of reserve ratio of 25%:

  RequiredReserve=Reserveratio×Deposits=0.25×$100,000=$25,000

The required reserve created by$100,000 if the bank faces the requirement of reserve ratio of 50%:

  RequiredReserve=Reserveratio×Deposits=0.5×$100,000=$50,000

Economics Concept Introduction

Required reserve:

It refers to a certain amount of cash from the deposits that banks need to keep according to the guidelines of central bank.

Required reserve is calculated by,

  RR=r×D

Here, RR is required reserve, r is percentage of required reserve and D is the total amount in

deposits.

Excess reserve:

The holding of reserves in excess by the banks or financial institutions than what is required by the regulators, creditors or internal controls is termed as excess reserve or capital reserve.

  ER=CashReserveRequiredReserve

Money multiplier:

It calculates the potential amount of money a bank generates with each dollar of reserves.

  Moneymultiplier=1R

Where, R is required reserve.

To determine

(b)

To compute:

The additional dollar that can be lent out as a result of $100,000 deposit for the given reserve requirements.

Expert Solution
Check Mark

Answer to Problem 13P

The additional dollar that can be lent out as a result of $100,000 deposit if the bank faces the given reserve requirements is as shown below:

    10percent$90,000
    20percent$80,000
    25percent$75,000
    50percent$50,000

Explanation of Solution

If the initial deposit is $100,000 with required reserve as $10,000.

Calculation for excess reserve:

  ER=CashReserveRequiredReserve= $100,000$10,000=$90,000

If the initial deposit is $100,000 with required reserve as $20,000.

Calculation for excess reserve:

  ER=CashReserveRequiredReserve=$100,000$20,000=$80,000

If the initial deposit is $100,000 with required reserve as $25,000

Calculation for excess reserve:

  ER=CashReserveRequiredReserve=$100,000$25,000=$75,000

If the initial deposit is $100,000 with required reserve as $50,000

Calculation for excess reserve:

  ER=CashReserveRequiredReserve=$100,000$50,000=$50,000

Working note:

The required reserve created by $100,000 if the bank faces the reserve ratio is 10% :

  RequiredReserve=Reserveratio×Deposits=0.1×$100,000=$10,000

The required reserve created by $100,000 if the bank faces the reserve ratio is 20% :

  RequiredReserve=Reserveratio×Deposits=0.2×$100,000=$20,000

The required reserve created by $100,000 if the bank faces the reserve ratio is 25% :

  RequiredReserve=Reserveratio×Deposits=0.25×$100,000=$25,000

The required reserve created by $100,000 if the bank faces the reserve ratio is 50% :

  RequiredReserve=Reserveratio×Deposits=0.5×$100,000=$50,000

Economics Concept Introduction

Required reserve:

It refers to a certain amount of cash from the deposits that banks need to keep according to the guidelines of central bank.

Required reserve is calculated by,

  RR=r×D

Here, RR is required reserve, r is percentage of required reserve and D is the total amount in

deposits.

Excess reserve:

The holding of reserves in excess by the banks or financial institutions than what is required by the regulators, creditors or internal controls is termed as excess reserve or capital reserve.

  ER=CashReserveRequiredReserve

Money multiplier:

It calculates the potential amount of money a bank generates with each dollar of reserves.

  Moneymultiplier=1R

Where, R is required reserve.

To determine

(c)

To compute:

The additional dollar that can be created by bank in response of a $100,000 deposit for the given reserve requirements.

Expert Solution
Check Mark

Answer to Problem 13P

The additional dollar that can be created as a result of $100,000 deposit if the bank faces the given reserve requirementsis as shown below:

    10percent$ 1,000,000
    20percent$ 500,000
    25percent$ 400,000
    50percent$ 200,000

Explanation of Solution

Potential money can be calculated for reserve ratio of 10%.

  PotentialMoney=InitialDeposit×MoneyMultiplier=$100,000×10=$1,000,000

Potential money can be calculated for reserve ratio of 20%.

  PotentialMoney=InitialDeposit×MoneyMultiplier=$100,000×5=$500,000

Potential money can be calculated for reserve ratio of 25%.

  PotentialMoney=InitialDeposit×MoneyMultiplier=$100,000×4=$400,000

Potential money can be calculated for reserve ratio of 50%.

  PotentialMoney=InitialDeposit×MoneyMultiplier=$100,000×2=$200,000

Working note:

Calculation of money multiplier for reserve ratio of 10%:

  Money multiplier=1R=10.1=10

Calculation of money multiplier for reserve ratio of 20%:

  Money multiplier=1R=10.2=5

Calculation of money multiplier for reserve ratio of 25%:

  Money multiplier=1R=10.25=4

Calculation of money multiplier for reserve ratio of 50%:

  Money multiplier=1R=10.5=2

Economics Concept Introduction

Required reserve:

It refers to a certain amount of cash from the deposits that banks need to keep according to the guidelines of central bank.

Required reserve is calculated by,

  RR=r×D

Here, RR is required reserve, r is percentage of required reserve and D is the total amount in

deposits.

Excess reserve:

The holding of reserves in excess by the banks or financial institutions than what is required by the regulators, creditors or internal controls is termed as excess reserve or capital reserve.

  ER=CashReserveRequiredReserve

Money multiplier:

It calculates the potential amount of money a bank generates with each dollar of reserves.

  Moneymultiplier=1R

Where, R is required reserve.

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