Table 29-6.
Bank of Springfield

-Refer to Table 29-6.Assume the Fed's reserve requirement is 6 percent and that the Bank of Springfield makes new loans so as to make its new reserve ratio 6 percent.From then on,no bank holds any excess reserves.Assume also that people hold only deposits and no currency.Then by what amount does the economy's money supply increase?

Question

Table 29-6.
Bank of Springfield
 
-Refer to Table 29-6.Assume the Fed's reserve requirement is 6 percent and that the Bank of Springfield makes new loans so as to make its new reserve ratio 6 percent.From then on,no bank holds any excess reserves.Assume also that people hold only deposits and no currency.Then by what amount does the economy's money supply increase?

Quizplus · Accepted Answer

The initial reserve requirement for the Bank of Springfield was ((20,000 + 5,000) * 0.06) = $1,500.

The current excess reserves of the Bank of Springfield are (3,000 - 1,500) = $1,500.

To achieve the desired reserve ratio of 6%, the Bank of Springfield must hold ((20,000 + 5,000 + X) * 0.06) = (25,000 + X) * 0.06 in reserves, where X is the amount of new loans made by the Bank of Springfield.

Solving for X, we get X = $80,000.

Since there are no excess reserves held by any bank, the money supply increases by the amount of new loans made, which is $80,000.

Therefore, the correct answer is C) $80,000.

Table 29-6. Bank of Springfield