1. Bank of Beacon Hill has total reserves of $40 million and current totalchecking account deposits of $200 million. With a legal reserve requirement of 10% of total checking accounts, what is the bank’s legal reserves and excess reserves? If the bank creates a new loan in the form of a new checking account equal to its excess reserves and each check is deposited in another commercial bank, what can the banking system do in total maximum new checking accounts (loans), given the simple bank deposit multiplier?
2. If banks desire to retain excess reserves of 10% of total checking accounts and borrowers hold 10% of their new checking accounts (loans) for liquidity purposes and do not spend that 10%, what will be the maximum impact on the money supply in the form of new checking accounts?