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How much of a new deposit can a bank lend

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Question a) The Federal Reserve wants to increase the supply of reserves, so it purchases $3 million dollars' worth of bonds from the primary dealers. Show the effect of this open market operation using T-accounts.

Question b) Use T-accounts to show the effect of the Federal Reserve being paid back a $700,000 discount loan from a bank.

Question c) Consider a bank policy to maintain 24% of deposits as reserves. The bank currently has $20 million in deposits and holds $800,000 in excess reserves. What is the required reserve on a new deposit of $100,000?

Question d) If the required reserve ratio is 10%, how much of a new $10,000 deposit can a bank lend? What is the potential impact on the money supply?

Reference no: EM132636414

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