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|
Now assume that the Fed lowers the reserve requirement to 8%.
- What is the maximum amount of new loans that this bank can make? Show your calculations
- Assume that the bank makes these loans. What will the new balance sheet look like? Show your calculations
- By how much has the money supply increased or decreased? Show your calculations
- If the money multiplier is 5, how much money will ultimately be created by this event? Show your calculations
- If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work? Show your calculations