The following is a bank's balance sheet (in millions of dollars). The reserve requirement is 20 percent.
|
Item
|
Assets
|
Liabilities
|
|
Checking Deposits
|
|
15
|
|
Loans
|
7
|
|
|
Securities
|
3
|
|
|
Vault Cash
|
1
|
|
|
Deposits at Fed
|
4
|
|
1. What are the bank's required reserves? Show your computation.
2. What are the bank's excess reserves? Show your computation.
3. What is the maximum amount of additional loans that the bank can make? Show your computation.
4. Assume that all the other banks have zero excess reserves. Now, if the bank makes this maximum amount of additional loans and the other banks do the same, by how much will M1 increase and by how much will M2 increase? Show your computation.
5. List reasons why the bank may not make the maximum additional loans and additional securities purchases.