Download Activity 11 - The Banking System and Monetary Policy

Econ 2013
Activity 11
Name:____________________________
Activity 11: The Banking System and Monetary Policy
Assume that the required reserve ratio in the United States is currently 20%. Answer the
following questions about the fractional reserve banking system, the money multiplier,
and monetary policy.
1. The Federal Open Market Committee decides to increase the money supply by buying
back $100,000 worth of bonds and people use this $100,000 to go see the new T-Pain
concert. Fresh off the hot concert, T-Pain takes his newly acquired $100,000 and puts
it in Big Bling Bank. Big Bling Bank would like to lend out as much of this new
deposit as it can to maximize its profits, but is required to maintain a fraction of the
deposit in their vaults. How much is Big Bling Bank allowed to lend out?
2. If the required reserve ratio is 20%, what is the Potential Deposit Expansion (Money)
Multiplier? What is the maximum amount the money supply can expand as a result
of this $100,000?
3. What are two reasons why the expansion of the money supply might be less than the
amount indicated by the Money Multiplier in question 2?
4. If the Fed wanted to use expansionary monetary policy to further increase the money
supply in an effort to stimulate the economy, then would it increase or decrease the
amount of reserves that banks are required to keep?