Exhibit 19-3 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | }
\hline { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$20,000 & \text { Checkable deposits } & \$ 100,000 \
\text { Excess reserves } &0& & \
\text { Loans } &80,000& \
\text { Total } & \$ 100,000 & \text { Total } & \$ 100,000 \
\hline
\end{array}$$ Assume all banks in the system started with balance sheets as shown in Exhibit 19-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

Question

Exhibit 19-3 Balance sheet of Tucker National Bank $$\begin{array} { | l r | l l | } 
\hline  { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Required reserves } & \$20,000 & \text { Checkable deposits } & \$ 100,000 \
\text { Excess reserves } &0& & \
 \text { Loans } &80,000& \
\text { Total } & \$ 100,000 & \text { Total } & \$ 100,000 \
\hline
\end{array}$$ Assume all banks in the system started with balance sheets as shown in Exhibit 19-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

Quizplus · Accepted Answer

Given the initial balance sheet, the bank has no excess reserves. After a $100,000 open market purchase by the Fed, the bank's reserves increase by $100,000, becoming excess reserves. Assuming a required reserve ratio of 20% (from the $20,000 required reserves on $100,000 deposits), the maximum potential expansion of the money supply is calculated using the money multiplier formula (1/required reserve ratio), which is 1/0.2 = 5. Thus, the $100,000 in new reserves can support a total expansion of $100,000 * 5 = $500,000 in the money supply.

Exhibit 19-3 Balance Sheet of Tucker National Bank Assume All Banks in the System Started with Balance Sheets