Econ 1102 Recitation 6 Gina Pieters Recitation 6 A Required and Excess Reserves B Fractional Reserve Banking C Fiscal Policy A Required and Excess Reserves Suppose that EconLand establishes a new Bank StarterBank Citizens of Econland deposit ALL their money 5000 in total in StarterBank The Reserve Ratio RR in EconLand is 10 1 What are StarterBanks original reserves 2 What are StarterBanks required reserves 3 What are StarterBanks excess reserves 4 What is the money multiplier in EconLand 5 What is the new money supply in EconLand B Fractional Reserve Banking 1 Jo sells a 500 Tbill deposits the money from the sale into a checking account in Wells Fargo The 500 is the initial money supply in this economy RR 0 10 WF Balance Sheet Assets Liabilities 2 Mike needs money to repair his car takes a 450 loan from Wells Fargo and pays Ann of Quick Repair who deposits the money into her account at Wells Fargo Assets Liabilities 3 Smith family takes out 405 loan to paint house They hire Jo who deposits the income in her account in Wells Fargo Page 1 of 3 Econ 1102 Recitation 6 Assets Gina Pieters Liabilities 1 What is the M1 balance at the beginning of this economy 2 What is the M1 balance at the end of this economy when we stop the example 3 What is the maximum new amount of money that can be created from Jo s initial deposit C Fiscal Policy Government wants to use fiscal policy to close a GDP gap of 200 How much would they need to spend if they reduce taxes How much would they need to spend if they increase government purchases Suppose that the government initially collects 100 in taxes and spends 100 in the output market 1 By how much would the government need to increase government spending to close the GDP gap 2 By how much would the government need to increase consumer transfers to close the GDP gap Practice Problems A Required and Excess Reserves Suppose that EconLand establishes a new Bank StarterBank Citizens of Econland deposit ALL their money 5000 in total in StarterBank The Reserve Ratio RR in EconLand is 20 a What are StarterBanks initial deposits Page 2 of 3 Econ 1102 Recitation 6 Gina Pieters b What are StarterBanks required reserves c What are StarterBanks excess reserves d What is the money multiplier in EconLand e What is the new money supply in EconLand B Fiscal Policy 1 Sps the government collects 200 in taxes and spends 200 in government purchases Supoose MPC 0 9 and GDP gap is 1500 Suppose the Government decides to change government purchases to stimulate aggregate demand What will the new level of government purchases be 2 Sps the government collects 200 in net taxes and spends 200 in government purchases Supoose MPC 0 9 and GDP gap is 1500 Suppose the Government decides to change consumer transfers to stimulate aggregate demand How much should the government transfer to consumers Page 3 of 3
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