Suppose the simplified consolidated balance sheet shown below is for the entire
ID: 1194220 • Letter: S
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 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? ____ $ 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 20 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 20 percent rather than 25 percent? _____ billion.
Explanation / Answer
a. The reserve ratio is 25 percent. So the required reserve is $ 50 billion ( 25% of $200 billion = (25/100)*200)
Thus the excess reserve is $ 60 - $ 50 = $10 billion
What is the amount of excess reserves in this commercial banking system? 10 $ billion.
What is the maximum amount the banking system might lend? 40 $ billion.
Explanation: As the reserve ratio is 25 percent. So the money mutiplier is 4 ( 1/.25).
Thus the maximum amount the bankiny system might lend is 10*4 =$ 40 billion
Column (1) of Assets data (top to bottom): $60 billion; $40 billion; $140 billion. Column (1) of Liabilities data: $240 billion.
Monetary multiplier = 4 (= 1/.25).
b. when the reserve requirment reduced to 20%
Required reserves = $40 billion (= 20% of $200 billion); so excess reserves = $20 billion (= $60 billion - $40 billion).
Maximum amount banking system can lend = $100 billion {= (1/.20 )$20 billion)}.
Column (1) of Assets data (top to bottom): $60 billion; $40 billion; $200 billion. Column (1) of Liabilities data: $400 billion.
Monetary multiplier = 5 (= 1/.20).
The decrease in the reserve ratio increases the banking system’s excess reserves from $10 billion to $20 billion and increases the size of the monetary multiplier from 4 to 5. Lending capacity becomes 5 *$20 = $100 billion.
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