Total reserves: Value $40 billion Transactions deposits: $750 billion Cash held by public: Required reserve ratio: $450 billion 0.05 a. How large is the money supply (M1)? b. Are the banks fully utilizing their lending capacity? Banks currently have Now assume that the public deposited another $10 billion in cash in transactions accounts. c. What would happen to the money supply initially (before any lending takes place)? Assuming the $10 billion in cash is not new money in the system, M1 will 69 1,200 billion billion in excess 69 $ 2.5 reserves. 30 billion not change d. How much would the total lending capacity of the banking system be after this portfolio switch? $ 30 billion e. How large would the money supply be if the banks fully utilized their lending capacity? f. What three steps could the Fed take to offset the potential growth in M1? Increase Increase Sell reserve requirements the discount rate bonds HA
Total reserves: Value $40 billion Transactions deposits: $750 billion Cash held by public: Required reserve ratio: $450 billion 0.05 a. How large is the money supply (M1)? b. Are the banks fully utilizing their lending capacity? Banks currently have Now assume that the public deposited another $10 billion in cash in transactions accounts. c. What would happen to the money supply initially (before any lending takes place)? Assuming the $10 billion in cash is not new money in the system, M1 will 69 1,200 billion billion in excess 69 $ 2.5 reserves. 30 billion not change d. How much would the total lending capacity of the banking system be after this portfolio switch? $ 30 billion e. How large would the money supply be if the banks fully utilized their lending capacity? f. What three steps could the Fed take to offset the potential growth in M1? Increase Increase Sell reserve requirements the discount rate bonds HA
Chapter4: Exchange Rate Determination
Section: Chapter Questions
Problem 20QA
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Transcribed Image Text:Total reserves:
Value
$40 billion
Transactions deposits:
$750 billion
Cash held by public:
Required reserve ratio:
$450 billion
0.05
a. How large is the money supply (M1)?
b. Are the banks fully utilizing their lending capacity?
Banks currently have
Now assume that the public deposited another $10 billion in cash in transactions accounts.
c. What would happen to the money supply initially (before any lending takes place)?
Assuming the $10 billion in cash is not new money in the system, M1 will
69
1,200 billion
billion in excess
69
$
2.5
reserves.
30 billion
not change
d. How much would the total lending capacity of the banking system be after this portfolio switch?
$
30 billion
e. How large would the money supply be if the banks fully utilized their lending capacity?
f. What three steps could the Fed take to offset the potential growth in M1?
Increase
Increase
Sell
reserve requirements
the discount rate
bonds
HA
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