1. A bank has $100,000 in deposits. It currently holds $60,000 in reserves.
a. If the required reserve ratio is 0.15, find the bank's required reserves and its excess reserves.
b. Why might a bank choose to hold excess reserves, given that excess reserves will not earn profit? (In this example, we are assuming that the Fed is not paying interest on reserves.)
2. We calculate the money multiplier as 1/reserve requirement. This assumes that banks will not hold any excess reserves. Would you expect the multiplier to be larger or smaller if banks decide to hold excess reserves? Explain.