Question

If the Fed sells bonds, the short run impact of this policy will tend to include: an increase in the inflation rate. a reduction in unemployment. an increase in real output. an increase in real interest rates. A bank's assets consist of $500,000 in total reserves, $1,600,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital. Refer to Exhibit 25-1. If the required reserve ratio is 30 percent, what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

zero; zero
$50,000;$50,000
$50,000;$500,000
The bank has insufficient reserves to meet its reserve requirements.

Answer 1

A bank with $500,000 in total reserves and a 30% reserve requirement on $2,000,000 in demand deposits is actually $100,000 short in reserves and thus cannot create additional money in the banking system.

Step-by-step explanation:

When the Federal Reserve (the Fed) sells bonds, it affects the banking system's reserves and, as a result, the banks' ability to create loans. If the Fed sells bonds, one impact on the short-term is an increase in real interest rates, not an increase in inflation or a reduction in unemployment. For a bank with assets consisting of $500,000 in total reserves, $1,600,000 in loans, and a building worth $1,200,000, and liabilities plus capital consisting of $2,000,000 in demand deposits and $1,300,000 in capital, we can calculate its excess reserves.

Given the required reserve ratio of 30%, the bank is required to maintain ($2,000,000 in demand deposits * 0.30) = $600,000 in reserves. The bank's current total reserves are $500,000, so it has no excess reserves and, in fact, is short $100,000 ($600,000 required - $500,000 actual) in reserves to meet the requirement. Therefore, the bank cannot use any excess reserves to create more money in the banking system, and it must acquire additional reserves to meet the requirement.