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While clearing debris from a house destroyed by Hurricane Katrina, a group of student helpers discovered a shoe box full of $100 bills--$30,000 in all. The students found the displaced homeowner, who promptly deposited the full amount in the local bank. Suppose the reserve requirement is 25%, and the bank was just meeting its reserve requirement prior to the deposit. a. How much of this new deposit is this bank required to hold in reserve?

a. How much does the deposit create in excess reserves?

b. What is the value of the money multiplier?

c. What is the potential increase in the money supply this new deposit can generate?

d. In an attempt to increase the value of its portfolio, suppose this same bank sells $30,000 in securities to its district Federal Reserve Bank. How much excess reserves will this transaction create for the bank? By how much can the money supply potentially increase as a result of this transaction?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91236129

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