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Banking and the money supply

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3. Assume that the following data describe the condition of the banking system
(see data in attached file)
(a) How large is the money supply?
(b) How large are the required reserves?
(c) How large are the excess reserves?
(d) By how much could the banks increase their lending activty?

6. Assume the banking system contains
(see data in attached file)
(a) Are the banks fully utilizing their lending capacity?
(b) What would happen to the money supply initially if the public deposited another $50 billion of cash in transaction accounts?
(c) What would the lending capacity of the banking system be after such a portfolio switch?
(d) How large would the money supply be if the banks fully utilized their lending capacity?
(e) What three steps could the Fed take to offset that potential growth in M1?

(See attached file for the remainder of the problems.

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Solution Summary

This solution helps with calculations involving the effects of reserve requirements on the money supply.

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3. a. The money supply is equal to transactions depositis and cash:
$800 billion
b. Required reserves are .2 x $700 billion = $140 billion
c. Excess reserves = $200 - $140 = $60 billion
d. They could lend an additional $60 billion.

6. a.
Lending capacity is 90% of transaction deposits (since the reserve requirement is 10%).
Since only 10% of total transaction deposits are being held in reserve, banks are fully utilizing their lending capacity.

b. The money supply would not change, since money has simply moved from cash to transactions.

c. The lending capacity of banks would increase by $45 billion to $755 billion.

d. The money multiplier is calculated as 1/(required reserve ratio). Thus, the money multiplier is 1/0.10 = 10. Since there are an addition $45 billion in reserves, the money ...

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