Total bank reserves: $34 billion Total bank deposits: $600 billion Cash held by
ID: 1214772 • Letter: T
Question
Total bank reserves: $34 billion
Total bank deposits: $600 billion
Cash held by public: $200 billion
Bonds held by public: $220 billion
Stocks held by public: $140 billion
Gross domestic product: $ 6 trillion
Interest rate 6 percent
Required reserve ratio: 0.05
(a)How large is the money supply?
(b)How much excess reserves are there?
(c)What is the money multiplier?
(d) What is the available lending capacity?
Explanation / Answer
a.
The money supply is transaction account balances and cash. Assuming that the total bank deposits are in transaction accounts the money supply is $800
b.
required reserve ratio = 0.05
Banks required to keep in reserve = 600*0.05 = 30
Banks total reserves = $34 billion
Hence, excess reserves = $34 - $30 = $4 billion.
c.
Money multiplier = 1/ required reserve ratio = 1/ 0.05 = 25
d.
Available lending capacity = money multiplier * excess reserves = 25*4 = $100 billion.