Problem Set 7
Econ 101
1. Suppose a bank receives a deposit of $48.
a.) How much deposit money can the bank create(at most) if the required reserve ratio (RRR) is .25.
b.) Show what the bank does with the initial $48 deposit in the next two rounds after the initial deposit to create this
deposit money. That is, show (using T accounts like we did in class)how the excess reserves, required reserves,
loans and total deposits change in each of the two rounds after the initial deposit.
2. Suppose a bank has $2 million dollars in deposits and has $500,000 in total reserves. Explain your answers to the
following questions clearly. Show all work and any formulas that you use.
a. At what required reserve ratio (rrr) does the bank have $0 of excess reserves?
b. At what required reserve ratio (rrr) does the bank have $100,000 in excess reserves?
c. Given the required reserve ratio in part a.), if someone deposits $10,000, how many dollars of deposits can be
created (at most)? Also, what is the deposit multiplier for this case?
3. Suppose a bank receives a deposit of $48
a) What if the bank wants to keep an overall reserve ratio of 1/3 and the required reserve ratio is .25, how much deposit
money can the bank the create?
b.) Show what the bank does with the initial $48 deposit in the next two rounds after the initial deposit to create this
deposit money. That is, show (using T accounts like we did in class)how the excess reserves, required reserves,
loans and total deposits change in each of the two rounds after the initial deposit.
4. Suppose a bank receives a deposit of $48
a) What if the bank wants to keep an overall reserve ratio of 1/3, the required reserve ratio is .25, and the percent of
currency people hold outside the bank after their loan is 25% how much deposit money can the bank create?
b) Show what the bank does with the initial $48 deposit in the next two rounds after the initial deposit to create this
deposit money. That is, show (using T accounts like we did in class) how the excess reserves, required reserves,
loans and total deposits change in each of the two rounds after the initial deposit.
5. Suppose a bank receives a deposit of $100. Explain your answers to the following questions clearly. Show all
work and any formulas that you use.
a. How much deposit money can the bank create (at most), if the required reserve ratio (RRR) is .12?
b. Show using the appropriate deposit multiplier what would happen (in part a.) if people started to hold some
percentage of the money they received from a loan outside the bank? (Hint: Pick some percentage of money
from a loan held outside the bank, and calculate the deposit multiplier and the amount of money the bank could
create)
Practice Multiple Choice (not for quiz):
1. The functions of money do not include
a. a medium of exchange.
b. a standard of deferred payment.
c. a unit of account.
d. a store of value.
e. none of the above.
2. Exchanging one good for another without the use of money constitutes
a. liquidity.
b. token exchange.
c. deferred payment.
d. barter.
e. Gresham's law.
3. When money is used to compare the relative values of other goods, it is being used as
