Suppose a banking system with the following balance sheet has no excess reserves
ID: 1201641 • Letter: S
Question
Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves.
Assets (in Billions)
Liabilities (in Billions)
Transactions accounts
Securities
190
Loans
180
Total
$400
Total
$400
(a) What is the reserve requirement?
Instructions: Enter your response as a percent rounded to one decimal place.
%
(b) Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity.
Instructions: Enter your responses as a whole number.
Assets (in Billions)
Liabilities (in Billions)
(c) By how much has the money supply changed as a result of the lower reserve requirement (step b)?
$ billion
(d) Suppose the Fed now buys $10 billion of securities directly from the banks. What will the banks’ books look like after this purchase but before the banks make any additional loans?
Instructions: Enter your responses as a whole number.
Assets (in Billions)
Liabilities (in Billions)
Instructions: Enter your responses as a whole number.
(e) How much excess reserves do the banks have now?
$ billion
(f) By how much can the money supply now increase?
Assets (in Billions)
Liabilities (in Billions)
Total reserves $30Transactions accounts
$400Securities
190
Loans
180
Total
$400
Total
$400
Explanation / Answer
Answer a) out of 400$ 30$ is kept as areserve . Thus reserve requirement is( 30/400) *100 =7.5%
Answer b) if new reserve requirement is 5%
Assets (in Billions)
Liabilities (in Billions)
Answer c) when reserve requirement was 7.5%
then total money supply was=400*100/7.5
=5333 $
with rate as 5%
then total money supply will be=400*100/5
=8000$
thus lower reserve requrement more is money supply.
Assets (in Billions)
Liabilities (in Billions)
Total reserves 20$ Transactions accounts 400$ Securities 195 Loans 185 Total 400$ TotalRelated Questions
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