Illustrate what is the discount rate in the banking system

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Discount Rate in the Banking System

(a) Third National Bank is fully loaned up with reserves of $20,000 and demand deposits equal to $100,000. The reserve ratio is 20%. Households deposit $5,000 in currency into the bank. How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.

(b) What is the discount rate in the banking system, and explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.

Reference no: EM1337127

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