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  • Ap - Macroeconomics Free-Response Questions (Form B)

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    A bank customer deposits $9,000 into their account. This increases the bank's reserves, allowing it to increase loans and the money supply. With a 10% reserve requirement and additional 10% in voluntary reserves, the bank can increase loans by $8,100 and the maximum money supply increase is $9,000. If the government spends $9,000 financed by bonds sold to the central bank, the money supply increases by $9,000 while money demand decreases as bond holdings rise.

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    Mac U4 FRQ #2 (Banks play an...) (4)

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    A bank customer deposits $9,000 into their account. This increases the bank's reserves, allowing it to increase loans and the money supply. With a 10% reserve requirement and additional 10% in voluntary reserves, the bank can increase loans by $8,100 and the maximum money supply increase is $9,000. If the government spends $9,000 financed by bonds sold to the central bank, the money supply increases by $9,000 while money demand decreases as bond holdings rise.

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    69 views1 page

    Ap - Macroeconomics Free-Response Questions (Form B)

    Uploaded by

    farttii
    A bank customer deposits $9,000 into their account. This increases the bank's reserves, allowing it to increase loans and the money supply. With a 10% reserve requirement and additional 10% in voluntary reserves, the bank can increase loans by $8,100 and the maximum money supply increase is $9,000. If the government spends $9,000 financed by bonds sold to the central bank, the money supply increases by $9,000 while money demand decreases as bond holdings rise.

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    AP• MACROECONOMICS FREE-RESPONSE QUESTIONS (Form B)

    2. Banks play an important role in determining changes in the money supply.


    (a) Assume that a bank receives a cash deposit of $9,000 from a customer. What is the immediate impact of this
    transaction on the money supply? Explain. .
    (b) Suppose that the reserve requirement is 10 percent and banks voluntarily keep an additional 10 percent in
    reserves. Calculate each of the following.
    (i) The maximum amount by which this bank will increase its loans from the transaction in part (a)
    (ii) The maximum increase in the money supply that will be generated from the transaction in part (a)
    (c) Assume that the government increases spending by $9,000, which.is financed by a sale o{bonds to the
    central bank.
    (i) Indicate what will happen to the money supply.
    (ii) Explain what will happen to the money demand.

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