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Economics 2302 Assignment 6

Economics 2302 Assignment 6. Tony Lima. Chapter 10, Question 6. Ch. 10 Q 6 answer. Reserves are 7 million. A required reserve ratio of 8 percent implies a money multiplier of 1/0.8 = 12.5. Therefore, with the new reserve requirement, the money supply will be 7 million x 12.5 = 87.5 million.

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Economics 2302 Assignment 6

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  1. Economics 2302Assignment 6 Tony Lima

  2. Chapter 10, Question 6

  3. Ch. 10 Q 6 answer Reserves are 7 million. A required reserve ratio of 8 percent implies a money multiplier of 1/0.8 = 12.5. Therefore, with the new reserve requirement, the money supply will be 7 million x 12.5 = 87.5 million. The increase in the money supply is87.5 – 70 = 17.5 million. If the central bank wants to offset the money supply increase, they must sell bonds.

  4. Chapter 10, Question 7

  5. Ch. 10 Q 7 answer First Bank’s demand deposits increase by $100,000. They must hold 4% x $100,000 or $4,000 as reserves. That leaves $100,000 - $4,000 = $96,000 available to lend. Second Bank’s demand deposits increase by the amount of the loan: $96,000. They must hold4% x $96,000 = $3,840 in additional reserves.

  6. Chapter 10, Question 14

  7. Ch. 10 Q 14 answer • The key here is figuring out what “loaned up” means. Since there are no excess reserves, the actual reserve ratio must equal the required reserve ratio. • M1 = $523 + $8 + $616 = $1,147. • Required reserves are 11% x $616 = $67.76. • If the required reserve ratio is increased to 12%, the $67.76 in reserves would support $67.76/0.12 = $564.67. • The change in the money supply would be$564.67 - $616 = -$51.33. • The second trick is figuring out that reserve requirements only apply to deposits.

  8. Chapter 10 Q. 15

  9. Chapter 10 Q. 15 With $3,500 in deposits, the bank’s required reserves are 0.12 x $3,500 = $420. Excess reserves = $530 - $420 = $110. The bank can lend all its excess reserves. Reserves will be $530 - $200 = $330 and deposits will be $3,500 - $200 = $3,300. The new level of required reserves are 0.12 x $3,300 = $396. The bank will have to borrow reserves or liquidate assets to make up the deficiency of $66.

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