Question

2. Use a T-Account to record a customer deposit of $20,000 into a checking account. Assume a fully loaned up system, no cash leakages and a required reserve of 10%. a. Show a properly labeled T Account (5 points) b. Indicate the maximum amount that a bank can loan out following the deposit. (5 points) C Indicate the potential money supply creation and change to money supply. Show your calculations (5 points) d. If the Fed increased the reserve ratio to 20%, what would be the impact on the money supply creation? Show the calculations (5 points) e. How will the money supply creation be affected if the public wishes to hold the currency rather than deposit the currency in the bank? (5 points)

answer all of questions on number 2, and answer can't be cursive.

Answer 1

1.

Required reserve = $20,000 x 10% = $2,000

Excess reserve = Loan = $20,000 - $2,000 = $18,000

Assets	$	Liabilities & Net worth	$
Required reserves	2,000	Checkable deposits	20,000
Loans	18,000

2.

Maximum lending by the bank = Excess reserve = $18,000

3.

An increase in deposit will increase money supply.

Maximum Increase in money supply = New deposit / Reserve ratio = $2,000 / 0.1 = $20,000

4.

When reserve ratio (rr) = 10%, Money supply (MS) = $20,000 / 0.1 = $200,000

When rr = 20%, MS = $20,000 / 0.2 = $100,000

Therefore, money supply will decrease by $(200,000 - 100,000) = $100,000.

5.

Let currency-deposit ratio be cr.

Money multiplier (MM) = (1 + cr) / (cr + rr)

Increase in MS = Increase in deposit x MM

Therefore, the higher the value of cr, the lower the value of MM and the lower the increase in money supply.