Refer to the table below and assume that the Fed%u2019s reserve ratio is 10 perc

Question

Refer to the table below and assume that the Fed%u2019s reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored.

By how many percentage points would the Fed need to increase the reserve ratio to eliminate 30.95% of the excess reserves?

percentage points

What would be the size of the monetary multiplier before and after the change in the reserve ratio?

Instructions: Round your answer to two decimal places.

The monetary multiplier before the change =

The monetary multiplier after the change =

By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio?

Decline in lending potential = $

rev: 08_22_2011

(1)
Reserve Ratio
(%) (2)
Checkable
Deposits (3)
Actual
Reserves (4)
Required
Reserves (5)
Excess
Reserves,
(3) - (4) (6)
Money-Creating Potential of Single Bank, = (5)
(7)
Money-Creating Potential of Banking System (1) 10 $26,000 11,000 2,600 $8,400 $8,400 84,000 (2) 20 26,000 11,000 5,200 5,800 5,800 29,000 (3) 25 26,000 11,000 6,500 4,500 4,500 18,000 (4) 30 26,000 11,000 7,800 3,200 3,200 10,667

Explanation / Answer

a) 0.9 * 0.3095 = 27.85 % is reserve ratio so increase by 25.5 points

b)before change = 1 /0.1 = 10

after change = 1/ 0.2785 = 3.5900

c) decline in lending potential = 27.85 -10 =17.85%

.

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