- Distinguish M1, M2, and M3. What are near monies?
- If you deposit a 20,000 dollar check into a checking account and your bank has a three percent reserve requirement, by houw much will the bank's excess rise? Consider the money multiplier. What is the maximum increase in money supply?
I already assessed the first question from my previous post. Although I would appreciate some assistance on the second and third one. No matter what I research the questions myself all I'm really looking for is a point in the right direction, just looking to save time.
Thanks
see my earlier post.
To answer the second question, let's break it down step by step and explain how to calculate the bank's excess reserves and the maximum increase in money supply.
1. Reserve Requirement: The reserve requirement is the percentage of deposits that banks must hold in reserve. In this case, the question states that the reserve requirement is three percent.
2. Deposit Amount: You deposited a $20,000 check into a checking account.
3. Excess Reserves: To calculate the bank's excess reserves, we need to multiply the deposit amount by the reserve requirement. In this case, the calculation would be $20,000 * 0.03 (3 percent reserve requirement), which equals $600.
So, the bank's excess reserves would rise by $600 as a result of your deposit.
4. Money Multiplier: The money multiplier is a concept that represents how much the money supply can increase based on an initial deposit. It is calculated as the reciprocal of the reserve requirement rate.
In this case, since the reserve requirement is 3 percent (0.03), the money multiplier would be 1/0.03, which equals approximately 33.33.
5. Maximum Increase in Money Supply: To calculate the maximum increase in money supply, we multiply the excess reserves by the money multiplier. In this case, it would be $600 * 33.33, which equals $19,998.
Therefore, the maximum increase in the money supply based on your deposit and the reserve requirement is $19,998.
In summary, when you deposit a $20,000 check into a checking account with a 3 percent reserve requirement, the bank's excess reserves will rise by $600, and the maximum increase in the money supply will be $19,998 based on the money multiplier.