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Assume that the following data describe the condition of the banking system. Use this information to answer five questions.

Total reserves $120 billion
Transactions deposits $800 billion
Cash held by public $300 billion
Reserve requirement 0.10

a. How large is the money supply (M1)?

1 Answer

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a. The quantity of the money supply (M1) is $1100 billion.

b. The required reserves is $80 billion.

c. The excess reserves is $50 billion.

d. The money multiplier is 10.

e. The unused lending capacity is $400 billion.

a. M1 refers to money supply that is composed of currency, demand deposits and other liquid deposits such as savings deposits.

Money supply (M1) = Transactions deposits + Cash held by public

= $800 + $300

= $1100 billion

b. The required reserve refers to the minimum cash the bank can keep on hand.

Required reserves = Reserve requirement × Deposits

= 0.10 × $800

= $80 billion

c. Excess reserves means funds held at the bank that exceed the Reserve's minimum requirement.

Excess reserves = Total reserves - Required reserves

= $120 - $80

= $40 billion

d. The money multiplier is the ratio that represents the increase in the money supply generated by each additional unit of reserves held by a central bank.

Money multiplier = 1/Required reserve ratio

= 1/0.10

= 10

e. Unused lending capacity refers to the portion of a financial institution's available funds or credit limit that has not been utilized by borrowers.

Unused lending capacity =

= Excess reserves × Money multiplier

= $40 × 10

= $400 billion

The full question is:

Assume that the following data describe the condition of the banking system. Use this information to answer five questions. Total reserves Transactions deposits Cash held by public Reserve requirement $120 billion $800 billion $300 billion 0.10 a. How large is the money supply (M1)? $ billion b. How large are required reserves? $ billion c. How large are excess reserves? $ billion d. What is the money multiplier? e. How much is the unused lending capacity? billion

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