Advanced Placement (AP) High School

Amy opens a new checking account and deposits $20,000 in cash at Metropolitan Bank. The

required reserve ratio is 25 percent. Use this information to answer parts (a)-(e).

(a) What is the amount by which Metropolitan Bank's liabilities have changed? Explain.

(b) Calculate the change in required reserves for Metropolitan Bank. Show your work.

(c) What is the dollar value of the maximum amount of new loans Metropolitan Bank can

initially make from Amy's deposit? Explain.

(d) As a result of Amy's deposit, calculate the maximum amount by which the money supply

can change throughout the banking system. Show your work.

(e) How will the change in the money supply in part (d) affect aggregate demand and

unemployment in the short run? Explain.

Answers

Answer 1

If Amy opens a new checking account and deposits $20,000 in cash at Metropolitan Bank.  This means that the bank's liabilities increase by $15,000.

What is  bank's liabilities?

(a) The deposit of $20,000 in cash increases Metropolitan Bank's assets by $20,000. However, since the required reserve ratio is 25%, the bank is required to hold 25% of the deposit, or $5,000, in reserves. This means that the bank's liabilities increase by $15,000 ($20,000 - $5,000).

(b) The change in required reserves is equal to the deposit amount multiplied by the required reserve ratio. In this case, the change in required reserves is 25% of $20,000, which is $5,000.

(c) The maximum amount of new loans that Metropolitan Bank can initially make from Amy's deposit is equal to the excess reserves, which is the amount of reserves the bank holds above the required reserve ratio. In this case, the bank's required reserves are $5,000 (25% of the $20,000 deposit), and the bank is holding $15,000 in excess reserves ($20,000 - $5,000). The bank can loan out up to the full amount of its excess reserves, which is $15,000.

(d) The maximum amount by which the money supply can change throughout the banking system is equal to the initial deposit multiplied by the reciprocal of the required reserve ratio. This is because when a bank makes a loan, the borrower's account is credited with new money, which can then be deposited in another bank, and so on. The maximum change in the money supply is:

$20,000 x (1/0.25) = $80,000

This means that the initial deposit of $20,000 can potentially lead to a maximum increase in the money supply of $80,000 if all banks loan out their excess reserves.

Learn more about bank's liabilities here:https://brainly.com/question/12939902

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