Daily quiz-29 (11/17): Print your name and ID in BLOCK letters.
While cleaning your apartment, you look under the sofa cushion find a $50 bill (and a
half-eaten taco). You deposit the bill in your checking account. The Fed’s reserve
requirement is 20% of deposits.
Q1.
What is the maximum amount that the money supply could increase?
Ans: Reserve ratio = R = 1/5. Maximum increase happens when banks hold no
excess reserves. Then ∆M1 = ∆Checkable deposits + ∆Currency in circulation =
(50 x 5) – 50 (currency has dropped because you have deposited the money) =
200
Q2.
What is the minimum amount that the money supply could increase?
Ans: Minimum increase happens when bank hold 100% reserves. ∆M1 = 50 –
50 = 0, then
Q3.
Suppose that banks desire to hold no excess reserves. The reserve requirement
is 5 percent. A bank receives a new deposit of $400. What amount of new loans
can the bank make with this new deposit?
Ans: Banks keep $20 and lends $380.