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Calculate the money multiplier

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Suppose the total amount of reserves in the economy is $5 billion, and the public does not directly hold any cash. Also, suppose all banks hold excess reserves equal to 4% of deposits and the required reserve ratio is 5%. (Please round numerical answers to two decimal places.)

a. Calculate the money multiplier.

b. What is the total money supply (or money stock)?

c.  Bank of America (BOA) has $300 million in deposits, $10 million in bank capital (net worth), $203 million in loans, and $80 million in other assets. 

Draw a balance sheet for BOA, showing all categories, including the amount of reserves the bank must be holding.

Now suppose that all banks in the economy decide to reduce excess reserves to just 1%.

d. Calculate the new equilibrium money supply, assuming the banks make new loans with all the funds they were formerly holding as reserves but no longer wish to hold.

Reference no: EM132396928

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