Describe how actual reserves are calculated. Explain the ...

[fnuegbu]

Describe how actual reserves are calculated. Explain the difference between required reserves and excess reserves. How do reserves affect the amount of loans a bank can make?
 
  What will be an ideal response?

Question 2

How is it possible for consumption expenditure to be positive even when disposable income is zero?
 
  What will be an ideal response?

[medine]

Answer to Question 1

Actual reserves are equal to the bank's reserves it keeps on deposit at the Federal Reserve plus the currency in the bank's vault. Required reserves are equal to the required reserve ratio multiplied by the bank's deposits. Banks might want to keep reserves over and above their required reserves. The amount of reserves banks want to keep is their desired reserves. Excess reserves equal actual reserves minus desired reserves. A bank can make loans equal to the amount of its excess reserves.

Answer to Question 2

Consumption expenditure can be positive when disposable income is zero because people can dissave, that is, they can use their past saving to finance current consumption expenditure. Dissaving cannot occur indefinitely because eventually people's savings will be dissipated.