4. This problem shows the effect of changes in the required reserve ratio on req

Question

4. This problem shows the effect of changes in the required reserve ratio on required and excess reserves Consolidated Balance Sheet of all Commercial Banks (in billions of dollars) Vault Cash S150 Deposits S1800 Reserves with Central Bank 75 1500 Net Worth 425 Government Securities 500 a)Assume the banks are fully loaned up (that is, they hold no excess reserves) Calculate the required reserve ratio b)Suppose that the Federal Reserve Bank sets the required reserve ratio at 10% Calculate the amount of required reserves and excess reserves for the banks c) With a required reserve ratio of 10% calculate the deposit multiplier. What is the maximum additional increase in new deposits which could occur given the amount of excess reserves you found in part (b)? d) If the Federal Reserve Bank raised the required reserve ratio to 15%, determine the new amount of required and excess reserves e) How much would the banking system have to contract the money supply by in order to meet the 15% reserve requirement?

Explanation / Answer

Ans

A required ratio=150+75/1800 (100)=12.5%

B required reserves=10% of 1800=180

Excess reserves =150+75-180=45

C deposit multiplier=1/10%=10

Maximum increase in new deposits=45(10)=450

D Required reserves =15% of 1800=270

Excess reserves =nil since reserves of 225 is less than 270

E (270-225)(10)=450

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.