1. Assume the following data describe the condition of the banking system: (8 pt

Question

1.     Assume the following data describe the condition of the banking system: (8 pts)

Checking deposits                     $800B

Cash held by public                 $200B

Savings/CD deposits               $1000B

Credit card balance                    $200B

Reserve requirement                    0.10

a.     How large is the M1? How large is the M2? (2 pts

b.     By how much could the banks increase their lending activities? (2 pts)

c.     What would happen to M2 if banks are reluctant to lend? (2 pts)

d.     Explain what steps can be taken by the Fed to increase M2? (2 pts)

Explanation / Answer

Total reserves: $80 billion
Transactions deposits: $800 billion
Cash held by public: $100 billion
Reserve requirement: 0.10

(a) How large is the money supply (M1)?
(b) Banks (are/are not) utilizing their lending capacity because their total reserves are (</>/=) their reserve requirement of $_____ billion.
c) Assuming the $20 billion in cash is not new money in the system, then M1 will (not change/ increase/ decrease)
d) What would the lending capacity of the banking system be after such a portfolio switch?
e) How large would the money supply be if the banks fully utilized their lending capacity?
f) What three steps could the Fed take to offset that potential growth in M1?

a. 800+100=$900 billion.
b. banks are utilizing lending capacity because total reserves= $80 billion= required reserves or 800 x .10=$80 billion. There is no excess reserve.
c cash is already in M1, it will not change
d.it will increase reserve. Lending capacity will increase.
e.The lending capacity= 1/.10 x 800=$8,000 billion.
f. the FED can change reserve ratio, discount rate, fund rate, etc.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.