Information for Question $2$A and $2B$

Baseline: Suppose Happy Bank gets $1000$ dollars as

deposits, keeps $10\%$ in reserves complying with the

Federal Reserve directives, has $350$ dollars worth of

government bonds & its Net Worth $($also known as

Bank Capital$)$ is equal to $0.$

New Scenario: Starting from the baseline, Happy

Bank for whatever reason starts holding $400$ in

reserves; but its Net Worth Remains at $0.$

The next two slides contain the same information

in a $T$ account form

Baseline

Bank Capital $=$ Assets $-$ Liabilities $=0$ Assets $=$ Liabilities

Fed :$10\%in$ reserves

Excess Reserves $=?-??=?$

Effective Reserve Ratio $(ERR)=\frac{\text{E}\text{f}\text{f}\text{e}\text{c}\text{t}\text{i}\text{v}\text{e}\text{R}\text{e}\text{s}\text{e}\text{r}\text{v}\text{e}\text{s}}{\text{D}\text{e}\text{p}\text{o}\text{s}\text{i}\text{t}}=\frac{??}{??}=?\%$

Effective Money Multiplier $(EMM)=\frac{1}{\text{E}\text{R}\text{R}}=\frac{1}{??\%}=?$

Effective Money Supply $=$ Money Base $$EMM$=??=??$

New Scenario

Bank Capital $=$ Assets $-$ Liabilities $=0$ Assets $=$ Liabilities

Fed :$10\%in$ reserves

Excess Reserves $=?-??=?$

Effective Reserve Ratio $(ERR)=\frac{\text{E}\text{f}\text{f}\text{e}\text{c}\text{t}\text{i}\text{v}\text{e}\text{R}\text{e}\text{s}\text{e}\text{r}\text{v}\text{e}\text{s}}{\text{D}\text{e}\text{p}\text{o}\text{s}\text{i}\text{t}}=\frac{??}{??}=?\%$

Effective Money Multiplier $(EMM)=\frac{1}{\text{E}\text{R}\text{R}}=\frac{1}{??\%}=?$

Effective Money Supply $=$ Money Base $$EMM$=??=??$

Question $2$A $(7$ points$)$

Use the information in the slides above and answer the

following questions

i$.$ Calculate the loans given by the bank in the new

scenario. Is this number greater or less than the

baseline? Why?

ii$.$ Calculate the excess reserves in the new scenario. Is

this number greater or less than the baseline? Why?

iii. Calculate the money multiplier in the new scenario?

Is this number greater or less than the baseline?

Why?

iv$.$ Calculate the money supply in the new scenario? Is

this number greater or less than the baseline? Why?