Question

Assume a target reserve ratio of 15%. A cheque for $45000 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 ($) 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. The excess reserves of Bank A have increased by $2,250. b. Bank A is now able to extend new loans of $42,750. c. The reserves of Bank B have decreased by $2,250. d. The excess reserves of Bank B have decreased by $2,250. e. The money supply has not increased in this case.

Step-by-step explanation:

a. To calculate the increase in excess reserves of Bank A, we need to first determine the required reserves. The required reserves can be found by multiplying the total deposits by the reserve ratio. In this case, the total deposits are $45,000 and the reserve ratio is 15%, so the required reserves are $6,750. The excess reserves are then calculated by subtracting the required reserves from the actual reserves, which is $9,000 - $6,750 = $2,250.

b. To calculate the amount in the form of new loans that Bank A can extend to borrowers, we need to subtract the increase in excess reserves from the total deposit received. In this case, the total deposit is $45,000 and the increase in excess reserves is $2,250, so Bank A can extend new loans of $45,000 - $2,250 = $42,750.

c. The reserves of Bank B have decreased by the same amount as the increase in excess reserves of Bank A, which is $2,250.

d. The excess reserves of Bank B have decreased by the same amount as the increase in excess reserves of Bank A, which is $2,250.

e. The money supply has not increased in this case because the increase in excess reserves of Bank A is balanced by the decrease in excess reserves and reserves of Bank B.