1. (8 points) Suppose we live in an economy with just one bank. Mary is the first customer of the bank and makes a deposit of $500. The required reserve ratio is 20%. (a) (2 points) What is the excess reserve amount? With this amount of excess reserve, is the bank allowed to make any loans? (b) (2 points) What is the maximum amount of loan that the bank can make if the borrower does not withdraw the money. (c) (2 points) What is the maximum amount of loan that the bank can make if the borrower decides to withdraw $100. (d) (2 points) What is the money multiplier?
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The required reserve ratio is 20%, so the bank is required to hold 20% of the deposit as reserves. Required reserves = 20% of $500 = 0.20 * $500 = $100 Excess reserves = Deposit - Required reserves = $500 - $100 = $400 Show more…
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