Assume the Fed buys a bond from a US bank for $1000, this becomes excess reserves for the bank and get loaned out, since we will assume banks do not hold on to excess reserves.

Suppose that all banks have a desired reserve ratio of 20%. The following table shows how deposits, reserves, and loans enable the creation of money.

A. Complete the table below:

B. After 5 rounds, what is the total change in deposits as a result of the single NEW deposit?

C. What is the eventual total change in deposits?

D. What is the eventual total change in the money supply?

E. Assume that the Federal Reserve implements a new law that sets a required reserve ratio equal to 30%. How would this have changed your answers to parts C and D.

Transcribed Image Text:

Round First Second Third Fourth Fifth $0 Change in Deposits $0 Change in Reserves Change in Loans $1000 Round First Second Third Fourth Fifth $0 Change in Deposits $0 Change in Reserves Change in Loans $1000

Answer rating: 100% (QA)

A Deposits Reserves Loans 1st 1000 2nd 1000 200 800 ... View the full answer