Suppose that the reserve requirement is 10 percent and the balance sheet of the People’s National Bank looks like the accompanying example.

a. What are the required reserves of People’s National Bank? Does the bank have any excess reserves?

b. What is the maximum loan that the bank could extend?

c. Indicate how the bank’s balance sheet would be altered if it extended this loan.

d. Suppose that the required reserves were 20 percent. If this were the case, would the bank be in a position to extend any additional loans?

Explain.

*18. Suppose that the reserve requirements are 10 percent and that the Federal Reserve purchases $2 billion in securities on a given day.

a. How will this transaction affect the M1 money supply?

b. If the brokerage firm that sold the bonds to the Fed deposits the proceeds of the sale into its account with Nation’s Bank, what is the maximum amount of additional loans that Nation’s Bank will be able to extend as a result of this deposit?

c. If additional loans are extended throughout the banking system and the proceeds are always redeposited back into a checking account, by how much will the M1 money supply increase if banks use all their additional reserves to extend new loans?