Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
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Balance Sheet for Ecoville International Bank
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ASSETS
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LIABILITIES
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Cash
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$33,000
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Demand Deposits
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$99,000
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Loans
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66,000
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Required:
Now assume that the Fed lowers the reserve requirement to 8%.
- What is the maximum amount of new loans that this bank can make?
- Assume that the bank makes these loans. What will the new balance sheet look like?
- By how much has the money supply increased or decreased?
- If the money multiplier is 5, how much money will ultimately be created by this event?
- If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?