2. Excess Reserves – those reserves held by a bank that exceed the level of reserves required by the FED.
In our simplified model:
Banks lend out all excess reserves
Borrowers hold their loans as bank deposits - NOT currency

3. Two Formulas __________1_________ Money multiplier =
Reserve requirement
Money multiplier =
Excess reserves increase in
(also the amount x multiplier = the money
of the first loan) supply

4. Assume that the bank’s reserve requirement is 10%
Assume that the bank’s reserve requirement is 10%. What is the money multiplier?
__1__ = __1__ = 10 rr
Assume the bank finds itself with $100 of extra reserves. How much will the money supply increase?
$100 x 10 = $1000

5. Assume that the bank’s reserve requirement is 5%.
If a bank has deposits of $100,000 and holds $10,000 as reserves, how much are its excess reserves?
$100,000 x .05 = $5,000 required reserves
$10,000 - $5,000 = $5,000 excess reserves

6. Assume that the bank’s reserve requirement is 5%.
If a bank holds no excess reserves and it receives a new deposit of $1,000, how much of that $1,000 is the bank required to keep as reserves
$1,000 x .05 = $50 required reserves
How much of that $1,000 can the bank lend?
$1,000 - $50 = $950 available to loan

7. Assume that the bank’s reserve requirement is 5%
Assume that the bank’s reserve requirement is 5%. What is the money multiplier?
__1__ = __1__ = 20 rr
Assume the bank loans out it’s $950 in excess reserves. How much will the money supply increase?
$950 x 20 = $19,000

8. Assume that the bank’s reserve requirement is 5%
Assume that the bank’s reserve requirement is 5%. By how much can an increase in excess reserves of $2,000 change the money supply?
__1__ = __1__ = 20 rr
$2,000 x 20 = $40,000