20-Assume that banking system has $200 billion in reserve. There are no excess r

Question

20-Assume that banking system has $200 billion in reserve. There are no excess reserves in the system at reserve requirement is decreased of $20 billion from 10% to 8 %. What will happen to the level of excess reserves in the system?

a. there will be a deficiency of $40 billion in reserves

b. there will be a deficienty of $20 billion in reserve

c. There will be $20 billion on excess reserves

d. There will be $40 billion in reserves

The required reserve ratio is 20 percent, but banks actually keep 25 percent on reserve. The actual money multiplier will be

a. 10

b.6

c.5

d. 4

e. 3

Explanation / Answer

20.

Initial reserve requirement = 10%

Initial reserves = $200 billion

Thus, total deposits = $200 billion/10% = $2000 billion

New reserve requirement = 8%

New reserves = 8% of $2000 = $160 billion

Thus, reserves decline by $200-$160 = $40 billion

Therefore, correct option: a. there will be a deficiency of $40 billion in reserves

21.

Actual multiplier = 1/actual rr = 1/0.25 = 4
Therefore, correct option: d. 4

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