A) By how many percentage points would the Fed need to increase the reserve ratio to eliminate 30.95% of the excess reserves? _____percentage points What would be the size of the monetary multiplier before and after the change in the reserve ratio? -The monetary multiplier before the change = -The monetary multiplier after the change = B) By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio? Decline in lending potential = $
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Refer to the table below and assume that the Fed’s reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored.
| (1) | (2) | (3) | (4) | (5) | (6) | (7) |
| Reserve Ratio, % | Checkable Deposits | Actual Reserves | Excess Reserves | Money-Creating Potential of Single Bank, = (5) | Money-Creating Potential of Banking System | |
| (1) 10 | $26,000 | $11,000 | $2600 | $8400 | $8400 | 84,000 |
| (2) 20 | 26,000 | 11,000 | 5200 | 5800 | 5800 | 29,000 |
| (3) 25 | 26,000 | 11,000 | 6500 | 4500 | 4500 | 18,000 |
| (4) 30 | 26,000 | 11,000 | 7800 | 3200 | 3200 | 10,667 |
A) By how many percentage points would the Fed need to increase the reserve ratio to eliminate 30.95% of the excess reserves?
_____percentage points
What would be the size of the monetary multiplier before and after the change in the reserve ratio?
-The monetary multiplier before the change =
-The monetary multiplier after the change =
B) By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio?
Decline in lending potential = $
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