Question 3 (a) Distinguish between legally required reserves and excess reserves. (b) Why don’t banks hold a100 percent reserves? How is the amount of reserves bank hold related to the amount of money...

Question 3

(a) Distinguish between legally required reserves and excess reserves.

(b) Why don’t banks hold a100 percent reserves?

How is the amount of reserves bank hold related to the amount of money the banking system creates?

Assume that Lucky Bank is required to hold a10% deposits as reserves, and there is a $3000 increase in demand deposits.

1. Calculate the money multiplier?


2. How much additional new demand deposits could the $3,000 deposit support?