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Math Help - Reserve Banking/Desired Reserves - Economics Question

  1. #1
    Junior Member
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    Exclamation Reserve Banking/Desired Reserves - Economics Question

    Been having a bit of trouble with some of the elements in this question...

    The question is:

    Someone deposits $30,000 into a local bank. The desired reserve ratio is 25%, and the bank was just meeting its desired reserve ratio prior to the deposit.

    a) How much of this new deposit will this bank hold in reserve? How much does the deposit create in excess reserves?

    I'm pretty sure I got the first part of this right...

    Desired Reserves = $30,000 * .25
    Desired Reserves = $7,500

    Therefore $7,500 would be held in reserve.

    But the second part I'm not too sure how to tackle because I don't have the actual reserves

    b) What is the value of the money multiplier? What is the potential increase in the money supply that this new deposit can generate?

    Well I know that...

    Money Multiplier = 1 / Desired Reserve Ratio
    Money Multiplier = 4

    So, the potential money supply increase would be $30,000 * 4 which equals $120,000 (not sure if I am correct)

    c) Suppose this same bank sells $30,000 in securities to the Bank of Canada. How much in excess reserves will this transaction create for the bank? By how much can the money supply potentially increase as a result of this
    transaction?

    No clue how to approach this question Any help/guidance/confirmation would be appreciated.

    Thanks
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  2. #2
    Grand Panjandrum
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    Re: Reserve Banking/Desired Reserves - Economics Question

    Quote Originally Posted by peekay View Post
    Been having a bit of trouble with some of the elements in this question...

    The question is:

    Someone deposits $30,000 into a local bank. The desired reserve ratio is 25%, and the bank was just meeting its desired reserve ratio prior to the deposit.

    a) How much of this new deposit will this bank hold in reserve? How much does the deposit create in excess reserves?

    I'm pretty sure I got the first part of this right...

    Desired Reserves = $30,000 * .25
    Desired Reserves = $7,500

    Therefore $7,500 would be held in reserve.

    But the second part I'm not too sure how to tackle because I don't have the actual reserves
    The excess reserve is $30000-7500

    CB
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  3. #3
    Junior Member
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    May 2009
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    Barrie, Ontario
    Posts
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    Re: Reserve Banking/Desired Reserves - Economics Question

    Gotchya, was just confused because I've always been calculating it when actual reserves is known so I haven't been able to apply pattern recognition.

    Could I tackle c) the exact same way? Or would it be different?

    I know that securities on the statement would be reduced by $30,000 and the same with demand deposits because money is being "destroyed". (ie. customer from your bank buying your securities, therefore you reduce their demand deposit account and then reduce your securities)

    Thanks again Capt. for the help. Greatly appreciated.
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