3 The Federal Reserve buys 5 000 in

3. The Federal Reserve buys $5, 000 in bonds from Clark Consulting Services, which then deposits the money in a checking account at First Generation Bank. (a) As a result of the Federal Reserve’s actions, what is the change in the money supply if the required reserve ratio is 100 %? The CCSthe $5, 000 return a bond. The reserve requirement is in 100%, thefor $5, 000 of CCSFED thengives deposits $5, 000 into the bank, which Increase in the money supply of $5, 000. cash reserves are now required reserves. is required to hold 100%. Assets Liabilities $5, 000 Required Cash Reserves $5, 000 DD First Generation Bank

(b) If the required reserve ratio is reduced to 10 percent, calculate the following. (i) The maximum amount this bank could lend from this deposit. Now the bank does NOT have to hold 100% of cash reserves It only has to hold 10%. Assets $5, 000 Cash Reserves Liabilities $5, 000 DD First Generation Bank

(b) If the required reserve ratio is reduced to 10 percent, calculate the following. (i) The maximum amount this bank could lend from this deposit. The cash reserves now are broken up into required reserves and excess reserves: Assets Liabilities $5, 000 Cash $5, 000 DD $ 500 Required Reserves $4, 500 Excess Reserves First Generation Bank

(b) If the required reserve ratio is reduced to 10 percent, calculate the following. (i) The maximum amount this bank could lend from this deposit. The maximum amount the bank can lend is $4, 500, its excess reserves. Assets Liabilities $5, 000 Cash $5, 000 DD $ 500 Required Reserves $4, 500 Excess Reserves First Generation Bank

(b) If the required reserve ratio is reduced to 10 percent, calculate the following. (ii) The maximum increase in the total money supply from the Federal Reserve’s purchase of bonds To calculate the increase in money supply => take excess reserves ($4, 500) times the money multiplier 10 = $45, 000 + the original increase of $5, 000 Total increase in the MS of $50, 000. Assets Liabilities $5, 000 Cash $5, 000 DD $ 500 Required Reserves $4, 500 Excess Reserves First Generation Bank

(c ) If banks keep some of the deposit as excess reserves, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain. If the banks hold some of the excess reserves => increase in the money supply would be less than $50, 000 => banks lend less money => less money creation Assets Liabilities $5, 000 Cash $5, 000 DD $ 500 Required Reserves $4, 500 Excess Reserves First Generation Bank

(d) If the public decides to hold some money in the form of currency rather than in demand deposits, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain. The increase in the money supply would be less than $50, 000. Banks get less money => Banks lend less money => MS rises by less Assets Liabilities $5, 000 Cash $5, 000 DD $ 500 Required Reserves $4, 500 Excess Reserves First Generation Bank