yestersday bank A had no excess reserves today it recieved

yestersday bank A had no excess reserves . today it recieved a new deposit of $4,000                                         a) If the bank maintains a reserve requirement of 2 percent, what is the maximum loan that bank A can make ?

b) what is the maximum amount by which the money supply can be increase by a result of Bank A\'S new loan ?                  

Solution

a. loans=(1-a-b) deposits
if bank has no excess reserve,b=0
a is reserve requirement ratio
loans= (1-0.02) 4000=$3920
b. money multiplier=1/0.2=50
The maximum money supply created= 50x4000=$200,000 (answer)