ECON 2013 - Suppose a banking system

Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves.

Assets (in Billions) Liabilities (in Billions)

Total reserves $30 Transactions accounts $400

Securities 190

Loans 180

Total $400 Total$400

(a) What is the reserve requirement?

Instructions: Enter your response as a percent rounded to one decimal place.

%

(b) Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity.

Instructions: Enter your responses as a whole number.

Assets (in Billions) Liabilities (in Billions)

Total reserves $__ Transactions accounts$ __

Securities ___

Loans ___

Total$ ___ Total $ ___

(c) By how much has the money supply changed as a result of the lower reserve requirement (step b)?

$ billion

(d) Suppose the Fed now buys $10 billion of securities directly from the banks. What will the banks’ books look like after this purchase but before the banks make any additional loans?

Instructions: Enter your responses as a whole number.

Assets (in Billions) Liabilities (in Billions)

Total reserves $____ Transactions accounts$ ____

Securities _____

Loans _____

Total$ ____ Total$ ____

Instructions: Enter your responses as a whole number.

(e) How much excess reserves do the banks have now?

$ billion

(f) By how much can the money supply now increase?

$ billion