Answer:
(a) When Lucy deposits $40,000 in cash at ABC Bank, the bank’s liabilities increase by $40,000. This is because the bank now owes Lucy $40,000, which she can withdraw at any time.
(b) The required reserve ratio is 5 percent, so ABC Bank must hold 5 percent of Lucy’s deposit in reserve. The change in required reserves for ABC Bank is calculated as follows: $40,000 x 0.05 = $2,000.
© The maximum amount of new loans ABC Bank can initially make from Lucy’s deposit is equal to the excess reserves it has after meeting the required reserve ratio. In this case, the bank has excess reserves of $40,000 - $2,000 = $38,000. Therefore, the maximum amount of new loans ABC Bank can initially make from Lucy’s deposit is $38,000.
(d) The maximum amount by which the money supply can change throughout the banking system as a result of Lucy’s deposit is calculated using the money multiplier formula: 1 / Reserve Ratio. In this case, the money multiplier is 1 / 0.05 = 20. Therefore, the maximum amount by which the money supply can change throughout the banking system as a result of Lucy’s deposit is $40,000 x 20 = $800,000.
(e) In the short run, an increase in the money supply can lead to an increase in aggregate demand and a decrease in unemployment. This is because an increase in the money supply can lower interest rates and make borrowing cheaper for businesses and households. This can lead to increased spending on goods and services and higher demand for labor as businesses expand production to meet this increased demand.
Step-by-step explanation: