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 25 percent. Instructions: Refer to the balance sheet below. Enter your answers as whole numbers. 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 l'(a) how the consolidated balance sheet would look after this amount has been lent. What is the size of the monetary multiplier? Using the original figures, answer the questions in part a assuming the reserve ratio is 20 percent. 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(b) and 1'(b) how the consolidated balance sheet would look after this amount has been lent. What is the monetary multiplier? What is the resulting difference in the amount that the commercial banking system can lend when the required reserve ratio is 20 percent rather than 25 percent?

Explanation / Answer

excess reserve = reserve - required reserve

required reserve=25% * 56=14. so excess reserve= 56-14=42

max amount banking system lend= 75% 0f 56=42

money multiplier = 1 / reserve ratio = 1/0.25=4

when reserve ratio is 20%

excess reserve= 56-20% 0f 56=44.8

maximum amount bank can lend=80% of 56=44.8

multiplier= 1/ 0.2=5

difference in lending amount= 44.8-42=2.8

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