Title: Competency Assessment: (CU5 M2) Reserve Rate
Course: SkillsCom BA 101 16.0 > Section: Credit Unit 5 Module 2

Write a short essay in response to the scenario outlined below and be sure to explain your answers.

Congratulations! You just won $10 million in the lottery. Instead of squandering your new-found wealth on luxury goods and a life of ease, you have decided to stay in town and be a financial friend to your neighbors, who are hardworking but never seem to have enough money to fix up their homes or buy decent cars. The best way, you decide, is to start a bank that will make home and car loans at attractive rates. On the day that you open your doors, the reserve requirement set by the Federal Reserve System is 10%.

- What’s the maximum amount of money you can lend to residents of the town?
- What if the Fed raises the reserve requirement to 12%, then how much could you lend?
- In changing the reserve requirement from 10% to 12%, what’s the Fed trying to do - are they trying to curb inflation or lessen the likelihood of a recession?
- How will the Fed’s action contribute to this goal?