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discussionsectionhandout11answersfall2007

discussionsectionhandout11answersfall2007 - Econ 102 Fall...

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Econ 102: Fall 2007 Discussion Section Handout #11 Question #1. T- Accounts and the Money Multiplier All Banks are required to hold $1 in reserves for every $10 of deposits in this economy. Assume that all accounts were previously equal to 0 (or that we are only looking at changes), and that there are an infinite number of banks in this economy. a) At first Susan has $3000 cash in hand. Suppose that she deposits all of these in Bank #1. Fill the following table for Bank #1 immediately after Susan has made her deposit. Be sure to label all entries. Bank #1’s Balance Sheet Assets Reserve: $3000 Liabilities DD $3000 b) Because Susan deposits $3000 in cash in Bank #1, Bank #1 has i. Total Reserves = $3000 ii. Required Reserves = $300 iii. Excess Reserves = $2700 c) Now suppose that Bank #1 lends out any excess reserves to Bill. Bill uses the entire loan to buy a TV from Best Buy, who deposits his payment in Bank #2. Fill in the following table for Bank #1 and #2 immediately after Best Buy has deposited his payment (Bill’s loan) in Bank #2. Be sure to label all entries.
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