Question

Assume a target reserve ratio of 15%. A cheque for $35000 is drawn on an account in Bank B and deposited in a checking deposit in Bank A Round your final answers to 2 decimal places, if necessary. Do not enter comma ", or dollar sign ( 5 ) while entering your answer.

a. By how much have the excess reserves of Bank A increased?
b. How much in the form of new loans is Bank A now able to extend to borrowers?
c. By how much have reserves of Bank B decreased?
d. By how much have excess reserves of Bank B decreased?
e. By how much has the money supply increased?

Answer 1

a. By $29,750; b. $5,250; c. By $29,750; d. By $29,750; e. $233,333.33

Step-by-step explanation:

a. The increase in excess reserves of Bank A can be calculated using the formula:

Excess Reserves = (Initial Deposit) - (Required Reserve Ratio * Initial Deposit)

Substituting the values, we get Excess Reserves = $35,000 - (0.15 * $35,000) = $35,000 - $5,250 = $29,750

b. The amount in the form of new loans that Bank A can extend to borrowers can be calculated using the formula:

New Loans = (Initial Deposit) - (Excess Reserves)

Substituting the values, we get New Loans = $35,000 - $29,750 = $5,250

c. The decrease in reserves of Bank B can be calculated using the formula:

Reserves Decrease = (Initial Deposit) - (Required Reserve Ratio * Initial Deposit)

Substituting the values, we get Reserves Decrease = $35,000 - (0.15 * $35,000) = $35,000 - $5,250 = $29,750

d. The decrease in excess reserves of Bank B can be calculated using the formula:

Excess Reserves Decrease = (Initial Deposit) - (Required Reserve Ratio * Initial Deposit)

Substituting the values, we get Excess Reserves Decrease = $35,000 - (0.15 * $35,000) = $35,000 - $5,250 = $29,750

e. The increase in the money supply can be calculated using the formula

Money Supply Increase = (Initial Deposit) / (Required Reserve Ratio)

Substituting the values, we get Money Supply Increase = $35,000 / 0.15 = $233,333.33 (rounded to 2 decimal places)