Instructions
Changes in Monetary Policy
Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:
| Balance Sheet for Ecoville International Bank | |||
| ASSETS | LIABILITIES | ||
| Cash | $33,000 | Demand Deposits | $99,000 |
| Loans | 66,000 | ||
Now assume that the Fed lowers the reserve requirement to 8%.
- What is the maximum amount of new loans that this bank can make?
- Assume that the bank makes these loans. What will the new balance sheet look like?
- By how much has the money supply increased or decreased?
- If the money multiplier is 5, how much money will ultimately be created by this event?
- If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?
Follow Balance Sheet Instruction