I got d and e wrong. Can someone explain the correct answer in detail so I know
ID: 1130319 • Letter: I
Question
I got d and e wrong. Can someone explain the correct answer in detail so I know how to do it in my own please. Thank you
Assume that the following data describe the current condition of the commercial banking system Total reserves Transactions deposits Cash held by public Required reserve ratio Value $85 billion $800 billion $300 billion 0.10 a. How large is the money supply (M1)? 1,100 billion b. Are the banks fully utilizing their lending capacity? billion in exces reserves. No, because banks currently have Now assume that the public deposited another $20 billion in cash in transactions accounts. c. What would happen to the money supply initially (before any lending takes place)? Assuming the $20 billion in cash is not new money in the system, M1 not change d. How much would the total lending capacity of the banking system 18billion be after this portfolio switch? e. How large would the money supply be if the banks fully utilized 1,300 billion their lending capacity? f. What three steps could the Fed take to offset the potential growth in M1? Increase Increase Sell reserve requirements the discount rate bonds
Explanation / Answer
Answer:- how much would the total lending capacity of the banking system be after this portfolio switch:-
After the additional deposit of $20 billion in cash, the required reserve will be given as:-
Required reserve =(800+20)*0.1 = $82 billion
Initial Total reserve = $300 billion
Thus excess reserve can be given as= $300 billion - $82 billion =$218 billion
Money multiplier =1/reserve ratio = 1/0.1 = 10
Thus the lending capacity = $218 billion *10 = $2180 billion
Answer:- Let us consider that the lending capacity of $2180 is fully utilized
The money supply =Transaction deposits +cash remaining after the deposit +new money created after the lending capacity
The money supply=$820 billion +$85 billion +$2180 billion
The money supply =$3085 billion
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