TAKE NOTE: Keeping in mind $1 = K18.00, Attempt the following question.

Suppose that the economy initially has K700 in reserves.

(i) If the required reserve ratio is 20%, What is the total money supply, assuming there is no cash being held? What is the money multiplier? What is the amount of loans outstanding in the banking system?

(ii) How much does the money supply increase when the central bank adds $5.55 in new reserves?

(iii) If the central bank wants to make the money multiplier 10, what do they need to set the required reserve ratio to? if they make this change what happens to the money supply?

(iv) If a bank in this economy has $200 of reserves, $250 of loans and $450 of deposits, how much excess reserves are they holding (use the required reserve ratio of 10%)? How much could the bank make in additional loans?