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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 

Assets

Cash

$33,00

Loans

66,000

Liabilities
$99,000

Now assume that the Fed lowers the reserve requirement to 8%.

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

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