Suppose the simplified consolidated balance sheet shown below is for the entire

Question

Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 10 percent.

a. What is the amount of excess reserves in this commercial banking system? billion What is the maximum amount the banking system might lend? billion Show in columns 1(a) and 1(a) how the consolidated balance sheet would look after this amount has been lent. What is the size of the monetary multiplier? b. Using the original figures, answer the questions in part a assuming the reserve ratio is 5 percent. What is the amount of excess reserves in this commercial banking system?

Explanation / Answer

(a)

Reserve ratio = 10% or 0.10

Checkable deposits = $200 billion

Required reserves = Checkable deposits * Required reserves = $200 billion * 0.10 =$20 billion

Excess reserves = Total reserves - Required reserves = $56 billion - $20 billion = $36 billion

The amount of excess reserves in this commercial banking system is $40 billion.

The banking system has $50 billion in reserves. So, banking system can raise ($50 billlion/0.10) $560 billion in deposit.

If $560 billion in deposit is raised then banking system is able to dispense loan equal to the amount of difference between total deposits and reserves which is ($560 billion - $56 billion) $504 billion.

With loan of $100 billion already issued and securities of $44 billion purchased, banking system can lend a maximum of $360 billion.

Thus, the maximum amount banking system might lend is $360 billion.

Money Multiplier = Total deposits/Total reserves = $560 billion/$56 billion = 10

The Money Multiplier is 10.

(b)

Reserve ratio = 5% or 0.05

Checkable deposits = $200 billion

Required reserves = Checkable deposits * Required reserves = $200 billion * 0.05 =$10 billion

Excess reserves = Total reserves - Required reserves = $56 billion - $10 billion = $46 billion

The amount of excess reserves in this commercial banking system is $46 billion.

The banking system has $56 billion in reserves. So, banking system can raise ($56 billlion/0.05) $1120 billion in deposit.

If $1,120 billion in deposit is raised then banking system is able to dispense loan equal to the amount of difference between total deposits and reserves which is ($1120 billion - $56 billion) $1064 billion.

With loan of $100 billion already issued and securities of $44 billion purchased, banking system can lend a maximum of $920 billion.

Thus, the maximum amount banking system might lend is $920billion.

Money Multiplier = Total deposits/Total reserves = $1,120 billion/$56 billion = 20

The Money Multiplier is 20.

The resulting difference in the amount that the commercial banking system can lend when the required reserve ratio is 5 percent rather than 10 percent is ($920 billion - $360 billion) $560 billion.

Following is the complete Balance Sheet -

assets a b

liabilities and net worth a b

reserves . 56 56 56    securities . 44 44 44 loans 100 460 1020

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