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

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

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 .10 Assume the bank finds itself with $100 of extra reserves. How much will the money supply increase? $100 x 10 = $1000

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

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

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 .05 Assume the bank loans out it’s $950 in excess reserves. How much will the money supply increase? $950 x 20 = $19,000

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 .05 $2,000 x 20 = $40,000