Total bank reserves: $34 billion Total bank deposits: $600 billion Cash held by

ID: 1214772 • Letter: T

Question

Total bank reserves: $34 billion

Total bank deposits: $600 billion

Cash held by public: $200 billion

Bonds held by public: $220 billion

Stocks held by public: $140 billion

Gross domestic product: $ 6 trillion
Interest rate 6 percent

Required reserve ratio: 0.05

(a)How large is the money supply?

(b)How much excess reserves are there?

(c)What is the money multiplier?

(d) What is the available lending capacity?

The money supply is transaction account balances and cash. Assuming that the total bank deposits are in transaction accounts the money supply is $800

required reserve ratio = 0.05

Banks required to keep in reserve = 600*0.05 = 30

Banks total reserves = $34 billion

Hence, excess reserves = $34 - $30 = $4 billion.

Money multiplier = 1/ required reserve ratio = 1/ 0.05 = 25

Available lending capacity = money multiplier * excess reserves = 25*4 = $100 billion.

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