For 1 and 2 suppose that the T-account for First National Bank is as follows:
Assets Liabilities
Reserves $100,000 Deposits $500,000
Loans $400,000
1. If the Fed requires banks to hold 5 percent of deposits as reserves, First National has total reserves of $ __________, required reserves of $ __________, and excess reserves of $ __________.
2. The money multiplier is __________. If First national decides to loan out its excess reserves, the economy's money supply would initially increase by $ __________ and could potentially increase by $ __________.
3. The reserve ratio is 0.1. You take $100 you had kept under your pillow and deposit it in your bank account. The money supply initially increases by $ __________ when you do. If your bank only holds required reserves it will be able to increase the money supply by $ __________ as a result of your deposit.
4. The money multiplier in question 3 is __________ and the banking system as a whole could potentially increase the money supply by $ __________ as a result of your deposit.