Question

the solution for c. isnt $13,340 either.

Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored. (1) (2) 3 (5) Reserve Ratio. % Checkable Deposits Actual Reserves Required Reserves Excess Reserves Money-Creating Potential of Single Bank (5) $3.000 1,000 Money-Creating Potential of Banking System $30,000 5,000 $3.000 (1) 10 (2) 20 (3) 25 (4) 30 $20,000 20.000 20,000 20,000 $5,000 5,000 5,000 1,000 $2.000 4,000 5,000 5.000 5.000 - 1,000 -1.000 3,333 a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? Answer is complete and correct. b. What would be the size of the monetary multiplier before the change in the reserve ratio? Instructions: Round your answers to 2 decimal places. < Prev 4 of 5 !!! Next >

Answer 1

4. c) As lending potential of bank = Excess Reserves * Multiplier

So, Before change lending potential = $3000*10 = $30,000

After change lending potential = $2000*6.67 = $13,340

So, Decline in lending potential = $30,000 - $13,340 = $16,660

So, Answer is $16,660