Problem
Changes in Monetary Policy
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
Balance Sheet for Ecoville International Bank
ASSETS LIABILITIES
Cash $33,000
Demand Deposits $99,000
Loans 66,000
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?
The response must include a reference list. Using one-inch margins, double-space, Times New Roman 12 pnt font and APA style of writing and citations.