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 10 percent.

Instructions: All answers to this question should be entered as whole numbers.

Assets					Liabilities and net worth
	1	(a)	(b)			1'	(a)	(b)
Reserves	$52	$	$		Checkable deposits	$200	$	$
Securities	48	$	$
Loans	100	$	$

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

What is the maximum amount the banking system might lend? $  billion

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. Answer the questions in part a assuming the reserve ratio is 5 percent.

What is the amount of excess reserves in this commercial banking system? $  billion

What is the maximum amount the banking system might lend? $  billion

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?

Answer 1

Solution:-

(A). The Reserve ration is given at 10 percent.
Required Reserve = 10% * Checkable Deposit
= 0.10 * 200
= $20 Billion

Excess Reserves = Reserves - Required Reserve
= $52 - $20
= $32

Thus, the excess reserves are $32 Billion

The Maximum amount that the banking system might lend is calculated as follows:-

Amount = Money multiplier * Excess reserves
= 1 / 0.10 * $32 Billion
= 10 * $32
= $320 Billion
Thus, the maximum amount the banking system can lend is $320 billion

Money multiplier = 1 / RR = 1 / 0.10 = 10

(B). The Reserve ration is given at 5 percent.
Required Reserve = 5% * Checkable Deposit
= 0.05 * 200
= $10 Billion

Excess Reserves = Reserves - Required Reserve
= $52 - $10
= $42

Thus, the excess reserves are $42 Billion

The Maximum amount that the banking system might lend is calculated as follows:-

Amount = Money multiplier * Excess reserves
= 1 / 0.05 * $18 Billion
= 20 * $42
= $840 Billion
Thus, the maximum amount the banking system can lend is $840 billion

Money multiplier = 1 / RR = 1 / 0.05 = 20

The balance sheet is shown as follows:-

Assets	Amounts	Amounts	Amounts	Liabilities	Amounts	Amounts	Amounts
	(1)	(A)	(B)		(1)	(A)	(B)
Reserves	52	52	52	Checkables Deposits	200	520	1040
Securities	48	48	48
Loans	100	420	940

• The Banking system does not lose reserves
• The checkable deposits increase by the amount of loans