HW14 2.86@ Money and Banking

bank deposit(1-resv req)=excess res, excess res(1/resv req)=total change in M1

1. 400 (1-.25) 300 300 1/.25 1200

2. 500 (1-.2) 400 400 1/.2 2000

3. _ (1- _) 45 45 1/.1 _

4. _ (1- _) _ _ 1/.05 3800

5. 600 (1- _) 360 360 1/_ _

6. _ (1-.25) _ _ 1/_ 240

7. _ (1- _) _ _ 1/.2 300

8. 60 (1- _) _ _ 1/_ 180

9. 200 (1- _) 180 180 1/_ _

10. _ (1-.05) 285 285 1/_ _

11. 300 (1- _) _ _ 1/_ 700

12. _ (1- _) 120 120 1/_ 300

answers: .05 .05 .1 .1 .1 .2 .25 .25 .25 .3 .3 .4 .4 .4 .4 45 45 50 60 60 60 60 75 80 190 190 200 200 210 210 300 450 900 1800 5700

Instructions:

Driving by a bank at night maybe you think your savings are locked inside when in truth almost all of your savings are lent out. This dual existence is why banking is so crucial to an economy. When banks accept a deposit from the public, a portion must be kept as vault cash and this is determined by the reserve requirement or reserve ratio. Then what remains, called excess reserves, may be used by the bank. If no reserve requirement existed, one dollar could be deposited and re-deposited perpetually creating an infinite supply of money. However, the reserve requirement erodes this process and is determined by: excess reserves * 1/reserve requirement

If the reserve requirement is .2 and $100 is deposited then the money supply grows by $80 * 1/.2=$400

Also, excess reserves = deposit (1 - reserve ratio)

An example: if $100 is deposited and the reserve requirement rule is .2, then . . . .

bank deposit(1-resv req)=excess req, excess req(1/resv req)=total change in M1

$100(1-.2)=$80, $80(1/.2)=$400