Description
Changes in Monetary Policy
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
Balance Sheet for Ecoville International Bank | |||
ASSETS | LIABILITIES | ||
Cash | $33,000 | Demand Deposits | $99,000 |
Loans | 66,000 | ||
Now assume that the Fed lowers the reserve requirement to 8%.
- What is the maximum amount of new loans that this bank can make?
- Assume that the bank makes these loans. What will the new balance sheet look like?
- By how much has the money supply increased or decreased?
- If the money multiplier is 5, how much money will ultimately be created by this event?
- If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?
Submission Details:
- Address the questions above, showing your calculations.
- Develop your analysis in Microsoft Excel format.
- Enter non-numerical responses in the same worksheet using textboxes.
- Name your document SU_ECO2072_W4_LastName_FirstInitial.
- Submit your document to the Submissions Area by the due date assigned.
Explanation & Answer
Attached.
What is the maximum amount of new
loans that this bank can make?
The maximum amount of new loans which the bank can give is $313500.At an 8% reserve requirement the bank can lend the
demand deposit($99000) which is $ 91080,while the reserve is $7920.Having lent $66000 the remainig amount which can be
The new loan amount is therefore given by multiplying the money multiplier and the remaining amount that can be lent. In t
diving 1 by the reserve ratio,giving us 12.5 which is multiplied by the remaing lent money ($25080) it gives$ 313500.
Assume that the bank makes these loans.
Wh...
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