In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answer. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. The following is a simplified balance sheet for Mi Tierra Bank in the United States. Mi Tierra Bank Assets Liabilities Required reserves $10,000 Demand deposits $100,000 Excess reserves $5,000 Loans $85,000 Owner's equity $0
a. What is the reserve requirement?
b. Assume that Luis withdraws $5,000 in cash from his checking account at Mi Tierra Bank i. By how much will Mi Tierra Bank's reserves change based on Luis' withdrawal? ii. What is the initial effect of the withdrawal on the M1 measure of money supply? Explain. iii. As a result of the withdrawal, what is the new value of excess reserves on the balance sheet of Mi Tierra Bank based on the reserve requirement from part (a)? c. Assume that the next day John withdraws from Mi Tierra Bank an amount that exceeds the bank's excess reserves. Assuming that no loans are called in, how can Mi Tierra Bank cover its required reserves?
