Question

Answer the question on the basis of the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions.

Assets Liabilities & Net Worth
Reserves $200 Checkable Deposits $1,000
Securities 300 Stock Shares 400
Loans 500
Property 400
If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of _____ would occur and the monetary multiplier would fall to ____.
a. $50 billion; 5
b. $10 billion; 4
c. $50 billion; 4
d. $10 billion; 8

Answer 1

If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of $50 billion would occur and the monetary multiplier would fall to 4. The right answer is c

Step-by-step explanation:

In order to calculate the deficiency of reserves in the commercial banking system we would have to make the following calculation:

deficiency of reserves in the commercial banking system=New Reserves- Reserves

Reserves=Checkable Deposits*reserve requirement

Reserves=$1,000*20%

Reserves=$200 billion

New Reserves=Checkable Deposits*reserve requirement increase

New Reserves=$1,000*25%

New Reserves=$250 billion

Therefore, deficiency of reserves in the commercial banking system=$250 billion-$200 billion

deficiency of reserves in the commercial banking system= $50 billion

To calculate the monetary multiplier we would have to make the following calculation:

monetary multiplier=1/new reserve ratio

monetary multiplier=1/0.25

monetary multiplier=4

Therefore, If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of $50 billion would occur and the monetary multiplier would fall to 4