Question

Ryan Bank holds reserves of $7,500

and demand deposits of $10,000
. The required reserve ratio is 5%
.


(a) What is the amount of Ryan Bank’s liabilities? Explain.


(b) Calculate Ryan Bank’s required reserves. Show your work.


(c) Given the amount of reserves and demand deposits, what is the dollar value of the maximum amount of new loans Ryan Bank can make? Explain.


(d) Based on your answer to part (c), calculate the maximum amount by which the money supply can change throughout the banking system. Show your work.


(e) If the central bank would like to reverse the effect on the nominal interest rate caused by the change in the money supply in part (d), what open market operation should the central bank take? Explain

Answer 1

Based on the bank reserves and the demand deposits, the following are true:

• Ryan Bank liabilities - $10,000.
• Ryan Bank required reserves - $ 500
• New loans that can be made - $7,000
• Money supply - $140,000.
• The Central Banks should purchase treasury securities in the open market.

What are the bank liabilities and require reserves?

The liabilities are the same as the demand deposits which are $10,000.

The required reserves can be found as:
= 10,000 x 5%

= $500

What amount of new loans can be made?

The new loans that can be made are:

= Reserves - Excess reserves

= 7,500 - 500

= $7,000

What is the new money supply ?

This can be found as:

= New loans / Required reserve ratio

= 7,000 / 5%

= $140,000

If interest rates fall as a result of the increase in money supply, the Central Bank can buy securities on the open market to reduce money supply and increase rates.

Find out more on open market operations at https://brainly.com/question/14256204.