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. All figures are in billions. The reserve ratio is 25 percent. A. What amount of excess reserves does the commercial banking system have? What is the maximum amount the banking system might lead? Show in column 1 how the conslidated balance sheet would look after this amount has been lent. what is the multiplier?
B. Answer the questions in part a assuming the reserve ratio is 20 percent. Explain the resulting difference in the lending ability of the commercial banking system
Assets (I) Reserves $52, Securities $48 Loans $100 Liabilities and net worth (I) Checkable deposits $200

Explanation / Answer

(a) Required reserves = $50 billion (= 25% of $200 billion); so excess reserves = $2 billion (= $52 billion - $50 billion). Maximum amount banking system can lend = $8 billion (= 1/.25 ? $2 billion). Column (1) of Assets data (top to bottom): $52 billion; $48 billion; $108 billion. Column (1) of Liabilities data: $208 billion. Monetary multiplier = 4 (= 1/.25). (b) Required reserves = $40 billion (= 20% of $200 billion); so excess reserves = $12 billion (= $52 billion - $40 billion). Maximum amount banking system can lend = $60 billion (= 1/.20 ? $12 billion). Column (1) data for assets after loans (top to bottom); $52 billion; $48 billion; $160 billion. Column (1) data for liabilities after loans: $260 billion. Monetary multiplier = 5 (= 1/.20). The decrease in the reserve ratio increases the banking system’s excess reserves from $2 billion to $12 billion and increases the size of the monetary multiplier from 4 to 5. Lending capacity becomes 5 ? $12 = $60 billion.

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