Question

Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 10 percent Instructions: Refer to the balance sheet below. Enter your answers as whole numbers a. What is the amount of excess reserves in this commercial banking system? $billion. What is the maximum amount the banking system might lend?billion. Show in columns 1(a) and 1(a) how the consolidated balance sheet would look after this amount has been lent. What is the size of the monetary multiplier? b. Using the original figures, answer the questions in part a assuming the reserve ratio is 5 percent. What is the amount of excess reserves in this commercial banking system? $ billion. What is the maximum amount the banking system might lend? $billion Show in columns 1(b) and 1(b) how the consolidated balance sheet would look after this amount has been lent. What is the monetary multiplier? What is the resulting difference in the amount that the commercial banking system can lend when the required reserve ratio is S percent rather than 10 percent? billion. Assets Liabilities and net worth K Prev 7 of 15 Next >

Answer 1

Answer:

(1). The Reserve ratio is given at 10 percent.
Required Reserve = 10% * Checkable Deposit
= 0.10 * 200
= $20 Billion

Excess Reserves = Reserves - Required Reserve
= $52 - $20
= $32

Thus, the excess reserves are $32 Billion

The Maximum amount that the banking system might lend is calculated as follows:-

Amount = Money multiplier * Excess reserves
= 1 / 0.10 * $32 Billion
= $320 Billion
Thus, the maximum amount the banking system can lend is $320 billion

Money multiplier = 1 / RR = 1 / 0.10 = 10

(b). The Reserve ratio is given at 5 percent.
Required Reserve = 5% * Checkable Deposit
= 0.05 * 200
= $10 Billion

Excess Reserves = Reserves - Required Reserve
= $52 - $10
= $42

Thus, the excess reserves are $42 Billion

The Maximum amount that the banking system might lend is calculated as follows:-

Amount = Money multiplier * Excess reserves
= 1 / 0.05 * $42 Billion
= $840 Billion
Thus, the maximum amount the banking system can lend is $840 billion

Money multiplier = 1 / RR = 1 / 0.05 = 20

Difference in lending is 840 – 320 = 520

The balance sheet is shown as follows:-

The balance sheet is shown as follows:-

Assets	Amounts	Amounts	Amounts	Liabilities	Amounts	Amounts	Amounts
	(1)	(A)	(B)		(1)	(A)	(B)
Reserves	52	52	52	Checkables Deposits	200	200 + 320 = 520	200 + 840 = 1040
Securities	48	48	48
Loans	100	100 + 320 = 420	100 + 840 = 940

• The Banking system does not lose reserves
• The checkable deposits increase by the amount of loans