Question

21

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 25 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?     

    

     What is the maximum amount the banking system might lend?       

    

     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 20 percent. What is the amount of excess reserves in this commercial banking system?     

    

     What is the maximum amount the banking system might lend?     

    

     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 20 percent rather than 25 percent?

    

Assets Liabilities and net worth 60 Checkable deposits Reserves Securities Loans 60E S 200 42 100

Answer 1

ns.- :- The amount of excess reserves in this commer cial bankigg syslem are as follouo: * Εχcess reserve-Reserve-Required reserve * Required reserve Required resenve rotio x Deposil ohere, Required reserve ratio : 25% (0.25) Deposil-$20o billion *Required reserve 0-25x 2oob 5o billion

e maximum amount the bankio are as folloo The maximum onu't the bonke29% slem and the size of the monetary oultiplier are as follou imum omount banking sustlem con lend is ystem con le e maximum amount, banking system multiplier times of ezcess reserve Then Monetary Multiplier=L equired reserve ratio Plaximum amount lo lend 0.25 &billion oney mulbiplier- 0.25 billion The resulling difference in the amounl thol the commercial banking system con lend when the required reserve ratio is 20% rather than 25 perce are as follouw: nt (257)

equired reserve Ratio 0 20; *Excess reserve Rolio-52-(o 2x20o) 12 billio Amount loan 12 0.2 6o billion * lonev multiplier 2 15 *The difference in lending (60-5) 55 billion * Balance gheet are as follo diabilities and nelworth (O) (b 200 208 26o a) (b Checkable deposits eserves 52 5 Securilies 48 48 48 Loans loo to8 L60