AP® Macroeconomics · Free response

A bank balance sheet: required and excess reserves, lending and the money supply

write it first, then score yourself point by point

Short free-response question · four-function calculator · 5 points · about 12 minutes

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The question

Name: ______________________   Date: ____________   A bank balance sheet: required and excess reserves, lending and the money supply (5 points)

Harbor Bank is a commercial bank in a banking system with limited reserves, where the reserve requirement limits lending: banks lend all of their excess reserves, and borrowers keep none of their loans as cash. Its balance sheet is shown below.

Data

Balance sheet of Harbor Bank

Balance sheet of the invented Harbor Bank, in dollars. The required reserve ratio is 0.2, and Harbor Bank has no other liabilities (invented data).
AssetsDollarsLiabilitiesDollars
Reserves150,000Checkable deposits500,000
Loans350,000

  1. (A) Calculate Harbor Bank's required reserves. Show your work. [1 point]

  2. (B) Calculate Harbor Bank's excess reserves. Show your work. [1 point]

  3. (C) Identify the maximum amount Harbor Bank can lend right now. [1 point]

  4. (D) If Harbor Bank lends the amount in part C, calculate the maximum change in the money supply for the whole banking system. Show your work. [1 point]

  5. (E) Separately, a customer deposits $10,000 of cash into a checking account at Harbor Bank. Explain what happens to the money supply (M1) at the moment of the deposit. [1 point]