Question

The following table shows a simplified consolidated balance sheet for the entire

banking system (all figures are in billions). The reserve ratio is 25 percent.
Assets Liabilities &Equity
Reserves 96 Checkable Deposits 400
Securities 104
Loans 200
a. 1. What is the amount of excess reserves in this banking system?
2. What is the maximum amount the banking system might lend?
3. Show how the balance sheet would look after this amount has been lent
(construct new balance sheet or add columns).
4. What is the size of the monetary multiplier?
b. 1. Answer the questions in part a assuming the reserve ratio is 15 percent.
2. What is the resulting difference in the amount that the banking system can
lend? How do you explain the difference?

Answer 1

Kindly check explanation

Step-by-step explanation:

Excess reserve = (Actual reserve - required reserve)

Required reserve = reserve ratio × Checkable deposit

Required reserve = 0.25 × $400 billion

Required reserve = $100 billion

Excess reserve = $96 - $100 = - $4billion

B) money multiplier = 1/ required reserve ratio

1/0.25 = 4

Maxumum amount that can be Lent = 4 × 4 = $16 million

If reserve ratio = 15%

Required reserve = 0.15 × $400 billion = $60 billion

Excess reserve = $96 - $60 = $36 billion

Monetary multiplier = 1/ 0.15 = 6.667

Maximum amount of loan = 6.667 × 36 = $240 billion