Ec2105MultExpanPractice - checking account at Bank A...

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EXTRA PRACTICE PROBLEMS ON THE MULTIPLE EXPANSION OF CREDIT 1. Suppose the Fed buys $5 million of government bonds from Bank A. If Bank A lends the maximum amount allowed, what will be the impact on the balance sheet or the T-Account of Bank A? Assets Liabilities and Equity - $5 million bonds + $5 million cash - $5 million cash + $5 million loans 2. If the required reserves ratio is 0.20, what will the increase in the money supply be caused by the $5 million bond purchase? (1/rrr)*(Bond Purchase) = (1/0.20)*($5 million) = (5)*($5 million) = $25 million
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3. What would have been the impact on the balance sheet or the T-Account of Bank A if the first step would have been Company XYZ depositing $5 million = $5,000,000 cash into a regular
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Unformatted text preview: checking account at Bank A assuming that (i) all banks lend all excess reserves, (ii) the required reserve ratio is still 0.20, and (iii) all loan proceeds are re-deposited at another bank? Assets Liabilities and Equity + $5,000,000 cash +$5,000,000 demand deposits- $5,000,000 cash + $1,000,000 required reserves + $4,000,000 excess reserves-$4,000,000 excess reserves +$4,000,000 loans 4. Calculate the increase in the money supply if the first step is Company XYZ depositing $5 million cash at Bank A assuming that banks lend all excess reserves and that the required reserve ratio is still 0.20. [(1/rrr) – 1]*(Bond Purchase) = [(1/0.20) – 1]*($5 million) = [5 – 1]*($5 million) = (4)*($5 million) = $20 million...
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