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 10 percent. What is the amount of excess reserves in this commercial banking system? What is the maximum amount the banking system might lend? Show in columns 1 (a) and 1' (a) how the consolidated balance sheet would look after this amount has been lent. What is the size of the monetary multiplier? Answer the questions in part a assuming the reserve ratio is 5 percent. What is the amount of excess reserves in this commercial banking system? What is the maximum amount the banking system might lend? 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?

Explanation / Answer

A.

required reserves = !0% of 200 = 20 billion

excess reserves = actual - required = 52-20 = 32 billion

Monetary multiplier = 1/required reserve = 1/0.1 = 10

Max amount the bank can lend is = monetary multiplier * excess reserves = 10*32 = 320 billion

B.

required reserves = 5% of 200 = 10 billion

excess reserves = actual - required = 52-10 = 42 billion

Monetary multiplier = 1/required reserve = 1/0.05 = 20

Max amount the bank can lend is = monetary multiplier * excess reserves = 20*42 = 840 billion

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