National Bank Case Study

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1 A. By itself the first national bank can only lend out $10,000. It can lend out the full about due to the fact that it is depositing all of that money into its reserves. In a case like this it is like the federal reserve is making new money and then depositing all of it. B. At most the bank could lend out would be 80% of the amount that they have on hand based on the 20% reserve rate ratio. By using the equation (change in 1/R) * change in R it would be 20% *10,000 equaling the 50,000 that the banking system as a whole can lend out. They are required to keep 20% in their own reserves which is why what they have left is 50,000 available to lend out. This is due to the fact that as a whole the maximum a bank can lend out is the excess of their required reserves. C. In the real world it is more likely for banks to keep a much higher amount of excess then their required reserve because it helps with financial crises such as the most recent one and it makes sure they are protected from not …show more content…

If it stated that rise in the nominal interest rates will cause a decrease in the real interest rate it would imply a rise in expected inflation that produces an expected depreciation of the dollar that is larger than the increase in domestic interest rates. As a result, the expected return on dollar assets falls at any exchange rate, shifting the demand curve to the left and leading to a fall in the exchange rate. But since we are unsure what happens to the real interest rate we are uncertain. If we take a look at the fisher effect it states that the real interest rate is equal to the nominal interest rate minus the expected inflation. Therefore, as inflation increases real interest rates fall unless the nominal interest rates increase alongside of inflation. Since we cannot consider inflation we cannot determine how the nominal interest rate will affect the

In this essay, the author

  • Explains that during the financial crisis the federal reserve increased the monetary base to keep the money supply stable when the multiplier declined due to excess reserves.
  • Explains the fisher effect, which states that the real interest rate is equal to the nominal interest rates minus the expected inflation.
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