Question

a. Calculate the reserve requirement. b. Assume that Rey withdraws $5,000 in cash from her checking account at Solo Bank. i. By how much will Solo Bank’s reserves change based on Rey’s withdrawal? ii. What is the initial effect of the withdrawal on the M1 measure of money supply? Explain. iii. Calculate the new value of excess reserves on the balance sheet of Solo Bank after the withdrawal based on the reserve requirement from part

Answer 1

Answer and Explanation:

(a) Reserve requirement

10%[ RR of $10,000 is 10% of DD of $100,000]

(b)

i All ER [of $5,000] would disappear and they would have only the RR of $10,000.

iiThe M1 MS would not change and the MS

will includes currency and DD of the public.

The $5,000 Luis withdrew [currency] is still M1.

iii When Luis withdrew $5,000, that simply means that RR was now $9,500.

Hence RR will be decrease by $500 and the remainder of the $5,000 withdrawal was taken from excess leaving only 500 currently in ER.

C.They can borrow from another bank which is either from Fed Funds Rate or from the Fed Discount Rate.