Assume that the reserve requirement is 12.5 percent and that $500,000 is added to Hometown Bank's excess reserves as a result of a change in Federal Reserve policy.
a. How much in new loans can Hometown Bank make as a result of this increase in excess reserves?
b. If the entire amount of Hometown Bank's new loans is spent and the funds are deposited in Bank B, by how much can Bank B increase its loan making?
c. What is the maximum amount by which loan making can be increased in the financial depository institutions system as a result of the increase in Hometown Bank's excess reserves?
d. What is the maximum amount in new loans that could be made in the financial depository institutions system following the initial increase in Hometown Bank's excess reserves if the reserve requirement were 20 percent?