Controlling the supply of money, Macroeconomics

When the reserve requirement changes, which of the following will change in the total banking system?  (Answer change or No Change)

Transaction Deposits

Total Reserves

Required Reserves

Excess Reserves

Lending Capacity

Suppose that a lottery winner deposits $20 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 25 percent and no excess reserves in the banking system prior to this deposit.

(a) Use step 1 in the T accounts below to show how her deposit affects the balance sheet of B of A.

(b) Has the money supply been changed by her deposit?

(c) Use step 2 below to show the changes at B of A after the bank fully uses its new lending capacity?

(d) Has the money supply changed in step2?

(e) In step 3 the new borrower(s) writes a check for the amount of the loan in step 2. That check is deposited at another bank and B of A pays the other bank when the check clears. What does the B of A balance sheet look like now?

(f) After the entire banking system uses the lending capacity of the initial ($20 million) deposit, by how much will the following have changed?

Posted Date: 3/16/2013 6:18:32 AM | Location : United States

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