Assume that the following data describe the condition of the commercial banking system: Total reserves: $80 billion Transactions deposits: $700 billion Cash held by public: $300 billion Reserve requirement: 0.10 A) How large is the money supply (M1)? B) Are the banks fully utilizing their lending capacity? Banks are/aren’t utilizing their lending capacity because their total reserves are less than/ greater than/ equal to their reserve requirement of $ ___ billion. C) What would happen to the money supply initially (before any lending takes place) if the public deposited another $20 billion in cash in transactions deposits? Assuming the $20 billion in cash is not new money in the system, then M1 will increase/ decrease/ not change.
Assume that the following data describe the condition of the commercial banking system:
Total reserves: $80 billion
Transactions deposits: $700 billion
Cash held by public: $300 billion
Reserve requirement: 0.10
A) How large is the money supply (M1)?
B) Are the banks fully utilizing their lending capacity? Banks are/aren’t utilizing their lending capacity because their total reserves are less than/ greater than/ equal to their reserve requirement of $ ___ billion.
C) What would happen to the money supply initially (before any lending takes place) if the public deposited another $20 billion in cash in transactions deposits? Assuming the $20 billion in cash is not new money in the system, then M1 will increase/ decrease/ not change.
D) How much is total lending capacity of the entire banking system after such a portfolio switch? $ __ billion
E) How large would the money supply be if the banks fully utilized their lending capacity? The money supply will fall to/ rise to $ __ billion
F) What three steps could the fed take to offset that potential growth in M1?
- Raise the discount rate, raise the reserve requirement, and buy bonds in the open market
- Lower the discount rate, lower the reserve requirement, and buy bonds in the open market
- Raise the discount rate, raise the reserve requirement, and sell bonds in the open market
- Raise the federal funds rate, lower the reserve requirement, and sell bonds in the open market
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