Reference no: EM1370753
Karen has kept her entire life savings, $50,000, in a floor safe underneath her bed. This morning, she decided to deposit her savings in a checking account at Cambridge Bank.
The following assumptions apply to all parts of this question:
Prior to her deposit, Karen was the only person in the U.S. that held cash
All banks in the U.S. are identical and hold 2% of their checking deposits as excess reserves
a. Consider the balance sheet of Cambridge Bank:
ASSETS LIABILITES & NET WORTH
Reserves $ 1,500,000 Checking Deposits $15,000,000
Loans $14,000,000 Net Worth $500,000
What is the required reserve ratio? Show your calculations.
b. How much did the money stock (using the definition we used in class, roughly equal to M1) change as a result of Karens deposit?
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