KEY QUESTION Suppose that Continental Bank has the simplified balance sheet shown on the previous page and that the reserve ratio is 20 percent:

a. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent this additional amount.

b. By how much has the supply of money changed?

Explain.

c. How will the bank’s balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in column 2.

d. Answer questions

a, b, and c on the assumption that the reserve ratio is 15 percent.