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%.

a.         What is the maximum amount of new loans that this bank can make?

b.         Assume that the bank makes these loans. What will the new balance sheet look like?

c.         By how much has the money supply increased or decreased?

Explain your answers.

Text material is from

Mankiw, N.G. (2008). Principles of economics, 5th edition.

            Chapters 29, 30, & 31

 Assignment 2 Grading Criteria           Maximum Points

Met the criteria for the correct responses to the questions assigned. 10

Used vocabulary relevant to this week's topics—at least five terms.             10

Submitted a well-structured report, free of spelling and grammatical errors and cited sources in APA format when necessary.        10

Justified ideas and responses by using appropriate examples and references from texts, Web sites, and other references or personal experience.      10

Total:   40