Assignment #4 Principles of Macroeconomics

1. You are given this balance sheet for a bank.


Assets Liabilities

Reserves $ 100 Deposits $1,000

Loans $ 900


The required reserve ratio is 10%.

a. How much is its excess reserve?

b. Suppose Ms. A deposits $500 to her account at this bank. Show the effect of this transaction on the bank’s balance sheet. How much is its excess reserve after the transaction?

c. How much will M1 increase when the money creation process (involving the whole banking sector and the general public) from the loan-making of this bank (using its excess reserve from part (b)) is completed. Assume that there are no leakages of cash holding by the general public and excess reserve holding by banks.

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