macroeconomics

| November 18, 2015

Use one side of a single piece of ruled paper to provide your answer to the following question. Neatness and clarity count. Be sure to print your name on your paper Explain why fractional reserve banking, and the behavior of commercial banks causes the money supply (M1) to increase by a multiple of the change in reserves within the banking system. Explain using an example in which new reserves are injected into the banking system when the FED purchases $1000 of bonds from the non-bank public. Assume the legal reserve requirement is 40% and that banks lend out all their excess reserves. Provide a neat/legible numerical example showing the modified balance sheets of different comercial banks showing at least 2 iterations of lending and borrowing. By how much does M1 change after all excess reserves have been loaned out?

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