How many new loans can a bank make? The maximum number of loans a bank can make will depend on the budget and monetary policy. While the central bank determines monetary policies, fiscal policy can be supervised by government. The new loans’ amount will depend on the reserves requirement of 8%. It is $66,480 Changes in the reserve requirements will affect the new loan criteria.
Imagine that the bank makes these loans. What will appear on the revised balance sheet?
This new cash equals $32,340 multiplied with 0.98
$ 66,000 – (66,000*2%) Equals $ 64,680 for new loans.
Deposits on demand will drop by 2%: $99,000 *0.98 = $97,020
The new balance sheet includes cash $32,340 and demand deposits $97,020. New loans $64,680 are also included.
Is the money supply increasing or decreasing in value?
Nominal production is what controls the money supply. This reflects the commercial banks’ desire to increase or decrease their money supply. The monetary policy in this case indicates that the money supply is expected to fall by 2%. Because the regulatory rules of the central bank have altered reserve requirements, this is why it has caused a decline in the money supply.
What amount of money can this event actually generate, if the money multiplier for money is 5
A money multiplier of five means that the reserve ratio would be one-fifth. The reserve requirement for 8% would mean that cash would double in value, with loans increasing by $6,600 while demand deposits rising by $19,000. The money multiplier of 5 multiplies this to yield $39,000.
To create a contractionary policy in monetary affairs, reserve requirements are used.
Constrictionary monetary policies are when central banks use money instruments in order to reduce inflation. The Fed may increase interest rates or restrict credit availability in order to reduce the amount of money they are able to lend. (Nelson, el. (2018) It reduces money supply and increases borrowing costs. In turn, banks will have less money to lend and be charged a higher rate of interest.
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