The commercial banks in Fundland have Reserves 500 million ...

[tsand2]

The commercial banks in Fundland have
 
  Reserves 500 million
   Loans 3,500 million
   Deposits 4,000 million
   Total assets 5,000 million
  The banks hold no excess reserves.
  a) Calculate the banks' desired reserve ratio.
  b) An immigrant arrives in Fundland with 10 million, which she deposits in a bank. How much does the immigrant's bank lend initially?

Question 2

Dole Co operates in a monopolistically competitive market. To try to earn an economic profit, Dole Co will
 
  A) prevent other firms from entering the market.
  B) increase its product's price.
  C) continually seek to differentiate its product.
  D) increase output.

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Answer to Question 1

a) With no excess reserves, the desired reserve ratio is the fraction of banks' total deposits that are held in reserves. So in Fundland, the banks' desired reserve ratio is 500/4000 = 0.125 or
12.5 percent.
b) With a desired reserve ratio of 12.5 percent, the bank keeps 10 million  0.125 = 1.25 million on reserve. It then lends the rest, so it lends 10 million - 1.25 million, which is
8.75 million.

Answer to Question 2

C

[tsand2]

Thank you

[Hdosisshsbshs]

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