Question

Suppose Robina Bank receives a deposit of $54,589 and the reserve requirement is 6%. Answer the questions using this information. Round your answers to two decimal places.

What is the amount that Robina Bank must keep on hand as required by the Federal Reserve (Fed)?
keep on hand: $__________

What is the amount that Robina Bank must have in excess reserves from this initial deposit?
excess reserves: $__________

What is the total change in the M1 money supply from this one deposit?
total change: $__________

Answer 1

1. Reserve requirement is 6% of $54,589 => $3,275.34

required reserves= initial deposit× reserve requirement

2. Excess reserve = Initial deposit - required reserve

excess reserves=$54,589−$3,275.34=$51,313.66

This is available for providing loans by bank.

3. Money multiplier = 1 / reserve requirement

Change in money supply = Money multiplier x excess reserves

change in M1=(1 / 0.06)×$51,313.66=$855,227.67

So as you can see, the excess reserves of $51,313.66 from one initial deposit of $54,589 generate a total change in the M1 money supply of $855,227.67 after multiple rounds of lending.