Macro Econ Reserve Ratio?

Question

1. The banking system receives new deposits of $2 million, the required reserve ratio is 0.1, and there is no currency drain, calculate

a. The bank's excess reserves as soon as the deposit is made.

b. The maximum amount of loans that the banking system can make.

c. The maximum amount of new money that the banking system can create.

2. If the banking system loses deposits of $3 million, the required reserve ratio is 0.1, and there is no currency drain, calculate

a. The bank's excess reserves as soon as the deposit withdrawal occurs.

b. The amount of loans that the banking system must call in.

c. The amount of money that the banking system must destroy.

Answer 1

1:

a) $2*(1-0.1)= 2*0.9= $1.8 million (excess reserves)

b) 1.8$/0.1= $18 million

c) $2/0.1 - $2 = 20-2 = $18 million

2:

a) -$3*(1-0.1)= -3*0.9= $ -2.7 million (shortage of reserves)

b) 2.7$/0.1= $27 million

c) $3 - $3/0.1 = 3-30 = $ -27 million (fall in money-supply)