Assume the reserve ratio = 12.5% or 1/8, and all of the commercial banks are initially lent

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Question:

Assume the reserve ratio = 12.5% or 1/8, and all of the commercial banks are initially "lent up"(i.e., their Excess Reserves = 0). DETERMINE THE FOLLOWING (a through f), if the "FED" BUYS $1 billion in US Government Bonds from one commercial bank, say Bank "A" and not from a Bank Ä" depositor (Use $ amounts in all your answers)

a. determine the change in the size of the nation's money supply, caused by the FED's purchase of US government bonds from Bank "A" alone [i.e. the quantity of money created by the FED, when THEY purchased those bonds from Bank "A"] = answer is [0], since The FED did not create money. They created bank Reserve assets and used those reserve assets to pay for the bonds they purchased from Bank A (i.e.. The Fed created Reserve assets to pay Bank A, but the FED did not create money, because Reserve assets are not money

b. now, determine the size of the Excess Reserves of this commercial Bank "A" =

c. now, using answer 10b, determine the maximum quantity of money that this commercial, Bank "Ä" can create and lend to a borrower (either households, firms or governments); and consequently, the maximum increase in the size nation's money supply that bank "A" will have) =

$900 Million

d. After this commercial Bank "A" lends the money to a borrower, and the borrower writes a CHECK to buying something from households, firms or governments and the receiver of the CHECK deposits the CHECK at their commercial bank which another commercial bank than bank "A", say bank"B" and after commercial bank "B" has that check cleared , determine the Excess Reserves of that second commercial bank, say bank B =

e. now, using answer to question 10 d, determine The maximum quantity of money that second commercial Bank "B" can create and lend to a borrower (either households, firms or governments, and consequently the maximum increase in the nation's money supply bank "B" will have (i.e. the maximum size loan the second commercial bank "B" can tender) =

f. Assuming this process continues until the last commercial bank's excess reserve = 0, determine the maximum quantity of money created by all the commercial banks in the banking system in total (i.e. the maximum increase in the nation's money supply by all the commercial banks in the banking system in total =

(remember you have to add up all the money being created by the many commercial banks in the banking system as this process continues until the last commercial bank's excess reserves approach 0)