How much money will ultimately be created by this event

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Reference no: EM13152283

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

Required:

Now assume that the Fed lowers the reserve requirement to 8%.

1) What is the maximum amount of new loans that this bank can make?

2) Assume that the bank makes these loans. What will the new balance sheet look like?

3) By how much has the money supply increased or decreased?

4) If the money multiplier is 5, how much money will ultimately be created by this event?

5) If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?

Reference no: EM13152283

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