Question

Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system and that all figures are in billions of dollars. The reserve ratio is 25 percent.

Instructions: Refer to the balance sheet below. Enter your answers as whole numbers.

a. What is the amount of excess reserves in this commercial banking system?

    What is the maximum amount the banking system might lend?

     Show in columns 1(a) and 1'(a) how the consolidated balance sheet would look after this amount has been lent.    

     What is the size of the monetary multiplier?

b. Using the original figures, answer the questions in part a assuming the reserve ratio is 20 percent. What is the amount of excess reserves in this commercial banking system?

    What is the maximum amount the banking system might lend?

    Show in columns 1(b) and 1'(b) how the consolidated balance sheet would look after this amount has been lent.   

    What is the monetary multiplier?

What is the resulting difference in the amount that the commercial banking system can lend when the required reserve ratio is 20 percent rather than 25 percent?

A B

.Reserves 52 checkable deposits 200 a b

Securities 48

loans 100

Answer 1

(a)

Checkable deposits = $200

Reserve ratio = 25% or 0.25

Required reserves = $200 * 0.25 = $50

Excess reserves = Total reserves - Required reserves = $52 - $50 = $2

Thus,

The amount of excess reserves in this commercial banking system is $2.

Calculate the maximum amount that the banking system might lend -

Maximum amount = Excess reserves * [1/Reserve ratio] = $2 * (1/0.25) = $8

The maximum amount that the banking system might lend is $8.

Following is the required balance sheet -

Assets	1	1(a)	Liabilities	1	1'(a)
Reserves	52	52	Checkable deposits	200	208
Securities	48	48
Loans	100	108

Calculate the monetary multiplier -

Monetary multiplier = 1/Reserve ratio = 1/0.25 = 4

The monetary multiplier is 4.

(b)

Checkable deposits = $200

Reserve ratio = 20% or 0.20

Required reserves = $200 * 0.20 = $40

Excess reserves = Total reserves - Required reserves = $52 - $40 = $12

Thus,

The amount of excess reserves in this commercial banking system is $12.

Calculate the maximum amount that the banking system might lend -

Maximum amount = Excess reserves * [1/Reserve ratio] = $12 * (1/0.20) = $60

The maximum amount that the banking system might lend is $60.

Following is the required balance sheet -

Assets	1	1(b)	Liabilities	1	1'(b)
Reserves	52	52	Checkable deposits	200	260
Securities	48	48
Loans	100	160

Calculate the monetary multiplier -

Monetary multiplier = 1/Reserve ratio = 1/0.20 = 5

The monetary multiplier is 5.

The resulting difference in the amount that the commercial banking system can lend when the required reserve ratio is 20 percent rather than 25 percent is $52.