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Econ 116 Problem Set 3 Answer Key

1 Econ 116 Problem Set 3 Answer Key 1. Assume that a bank has on its asset side reserves of 1000 and loans of 6000 and on its liability side deposits of 7000. Assume that the required reserve ratio is 10 percent. a. How much is the bank required to hold as reserves given its deposits of 7000? Required Reserves = Required Reserve Ratio Deposits Required Reserves = 7000 Required Reserves = 700 b. How much are its excess reserves? Excess Reserves = Actual Reserves Required Reserves Excess Reserves = 1000 700 Excess Reserves = 300 c. By how much can the bank increase its loans? Since excess reserves are positive, the bank can has free lending capacity and thus it can increase lending to businesses and consumers.

Problem Set 3 Answer Key 1.!Assume that a bank has on its asset side reserves of 1000 and loans of 6000 and on its liability side deposits of 7000. Assume that the required reserve ratio is 10 percent. a.!How much is the bank required to hold as reserves given its deposits of 7000? Required Reserves = Required Reserve Ratio × Deposits

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