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) Checkable Deposits $20,000 (3) Actual Reserves (4) Required Reserves (5) (6) (7) Reserve Ratio, Money-Creating Potential of Money-Creating Potential Single Bank,-(5) Excess Reserves of Banking System (1) 10 $5,000 $2,000 $3,000 $3,000 $30,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 0 0 (4) 30 20,000 5,000 6,000 -1,000 -1,000 -3.333 a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? b. What would be the size of the monetary multiplier before the change in the reserve ratio? Instructions: Round your answers to 2 decimal places. b. What would be the size of the monetary multiplier before the change in the reserve ratio? Instructions: Round your answers to 2 decimal places What would be the size after the change? c. By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio? Instructions: Enter your answer as an absolute value.
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) Checkable Deposits $20,000 (3) Actual Reserves (4) Required Reserves (5) (6) (7) Reserve Ratio, Money-Creating Potential of Money-Creating Potential Single Bank,-(5) Excess Reserves of Banking System (1) 10 $5,000 $2,000 $3,000 $3,000 $30,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 0 0 (4) 30 20,000 5,000 6,000 -1,000 -1,000 -3.333 a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? b. What would be the size of the monetary multiplier before the change in the reserve ratio? Instructions: Round your answers to 2 decimal places. b. What would be the size of the monetary multiplier before the change in the reserve ratio? Instructions: Round your answers to 2 decimal places What would be the size after the change? c. By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio? Instructions: Enter your answer as an absolute value.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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)
Checkable
Deposits
$20,000
(3)
Actual
Reserves
(4)
Required
Reserves
(5)
(6)
(7)
Reserve Ratio,
Money-Creating Potential of Money-Creating Potential
Single Bank,-(5)
Excess
Reserves
of Banking System
(1) 10
$5,000
$2,000
$3,000
$3,000
$30,000
(2) 20
20,000
5,000
4,000
1,000
1,000
5,000
(3) 25
20,000
5,000
5,000
0
0
(4) 30
20,000
5,000
6,000
-1,000
-1,000
-3.333
a. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves?
b. What would be the size of the monetary multiplier before the change in the reserve ratio?
Instructions: Round your answers to 2 decimal places.
Transcribed Image Text:b. What would be the size of the monetary multiplier before the change in the reserve ratio?
Instructions: Round your answers to 2 decimal places
What would be the size after the change?
c. By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio?
Instructions: Enter your answer as an absolute value.
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