Name: ________________________

Answer each of the following questions relating to fractional reserve banking and the expansion of the money supply.

1. Assume that the Bank of Macronomia currently has exactly $50,000 in excess reserves and $10,000 in required reserves. Assume that the reserve requirement is 20% in Macronomia. If Mr. Martin deposits $5,000 into this bank, what is the updated total amount of new loans Bank of Macronomia can loan out? (5 points: 3 for correct calculation; 2 for showing your work).

2. Again assume that the Bank of Macronomia currently has exactly $50,000 in excess reserves and $10,000 in required reserves. This time assume that the reserve requirement is 10% in Macronomia. If Mr. Martin deposits $10,000 into this bank, what is the maximum total amount of new money that might be created as a result of this one deposit? (5 points: 3 for correct calculation; 2 for showing your work).

3. Now assume that the current bank balance sheet for the Bank of Macronomia is shown below:

Assets	Liabilities
Reserves: $4,000	Deposits: $20,000
Loans: $16,000

Assume that the reserve requirement is currently 20%. What is the maximum amount total amount of new money that might be created if Mrs. Gonzalez deposits $1000 in the bank? (5 points: 3 for correct calculation; 2 for showing your work).

4. Now assume that instead of the maximum amount of money creation you calculated in #3 above, only about half of that amount truly ended up being created/added to the money supply in Macronomia as a result of Mrs. Gonzalezs deposit. Explain two reasons why this might be the case. (5 points total).