2. Assume that the bank makes these loans. What will the new balance sheet look like? If the Fed reduces the required reserve ratio to 8%, the bank is now required to keep 8% of $99,000, or $7920. The bank can then make loans worth $99,000 - 7920 =$91,080.
3. By how much has the money supply increased or decreased? The bank has already made actual loans worth $66,000 so it can further loan out $91,080-66,000 = $25,080.
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If the money multiplier is 5, how much money will ultimately be created by this event? If they made these loans, the balance sheet would look like this:
Assets
Cash: $7,920
Loans: $91,080
Liabilities
Demand Deposits: $99,000
5. If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work? If the bank actually loans out as much as allowed, then the initial increase in money supply is $25,080. The final increase when all rounds have been completed will be determined by the money multiplier that is given by 1/r, where r is the required reserve ratio. Given that r is 8%, the multiplier is 1/0.08 = 12.5. Hence, the increase in money supply is 12.5 x 25,080=