Refer to the accompanying consolidated balance sheet for the commercial banking

Question

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. The maximum amount by which the commercial banking system can expand the supply of money by lending is

A. $250 billion.

B. $600 billion.

C. $350 billion.

D. $450 billion.

2.

In the aggregate-expenditures model, the average price level is

A. measured along the vertical axis.

B. shown as a 45-degree line.

C. measured along the horizontal axis.

D.not shown on the AE graphs.

Assets Liabilities + Net Worth Reserves $60 Checkable Deposits $150 Loans 100 Stock Shares 135 Securities 25 Property 100

Explanation / Answer

1) Solution: 350

Working:

Monetary multiplier = 1 /0.12

With excess reserves of $42 billion, the banking system is capable of creating 8.33 times $42 billion = $350 billion of new money

2) Solution: shown as a 45-degree line.

Explanation: The 45 degree line is a tool used by economists to know the differences in real GDP and aggregate expenditures

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