1. First National bank has the following

Cash Reserves of $100,000

Loans of $400,000

Depoits of $500,000

Assume the Federal Reserve has a reserve requirment of 5%

a) Prepare a T-account for the bank

b) Of the $100,000 in cash reserves, how much are required and how much are excess?

c) How much can First National Bank make in loans?

d) What is the money multiplier?

e) What is the maximum amount by which money supply in the economy can increase by as a result of First National Bank's loan?

2. Assume the Fidelity Bank had no excess reserves yesterday. Today, Jane makes a cash deposit of $5000.

a) If the reserves requirment is 2%, what is the maximum loan that Fidelity Bank can make?

b) What is the maximum amount by which the money supply in the economy can be increased by as a result of Fidelity Bank's new loan?

3. If the Banking system has $500,000 in demand deposit liabilities, $125,000 in total reserves and a reserve requirment of 15%: What is the maximum amount by which the money supply in the economy can be increased by?

4. The money multiplier process gives us an idea of the maximum possible expansion in the economy's money supply. Can you think of a reason why the money supply might not expand to the maximum possible extent? Think of some of the events that have occured in recent years in the credit markets and business community to help you develop your answer.