Question of the Day: Day Seventeen

Assume that there are 100 banks in Country X, and that each bank has the same amount of assets and liabilities (i.e. that all banks are identical). The amount of those assets and liabilities for the typical bank (e.g. Bank A) in this system are provided below:

Assets of Bank A
Total Reserves: $1 million
Government Bond holdings: $500,000
Loans: $2 million
Other (Misc) Assets: $500,000

Liabilities of Bank A
Demand Deposits: $4 million

Assume that the required reserve ratio is 10%. Based on this assumption and the information provided above, please the answer the following questions.

1. Suppose the Fed raised the required reserve ratio to 25%, then describe would this affect the money supply and ability of the banking system to create money.

2. Assume that the required reserve ratio remained at 10%. If the Fed bought all government bonds held at Bank A, then by how much can the money supply expand if (all) banks loan out every dollar of available excess reserves created by this purchase of bonds?

3. Describe how Bank A's borrowing $500,000 from the Fed's discount window would affect their assets and liabilities above.