eserve requirement for banks is set at 5%. Households deposit savings of $35,000 into the Third National Bank.

(a.) Reserve requirement for banks is set at 5%. Households deposit savings of $35,000 into the Third National Bank.

(10 points) Ho

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w much excess reserve does the deposit generate for the bank?

(10 points) What is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.

 

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(b.) (10 points) What is the Discount Rate in the banking system?

(10 points) Explain how the Fed manipulates this rate in order to achieve macroeconomic objectives. (Points : 40)