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The following questions address money creation in the banking system. Assume the required reserve ratio is 10%.
a. Define bank reserves in the US banking system.
b. A large bank’s liabilities include $1 billion ($109) in checkable deposits. What are the Required Reserves?
c. The same bank has assets that include $100 million in vault cash
and $1 billion on deposit at the Federal Reserve Bank. What are the
excess reserves, if any?
d. What is the theoretical money multiplier? Show the computation.
e. A bank has $100 million in excess reserves that it wishes to lend.
Through the lend-spend-deposit cycle, by how much could the money
supply theoretically expand?
f. List 3 reasons the actual money multiplier will be less than the theoretical maximum.