Suppose the simplified consolidated balance sheet shown belo

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?

Solution

Required Reserves are Reserve Ratio* Checkable deposits=25%*200bn=50bn

hence Excess Reserve=Reserves-Required Reserves=$2 bn

Bank can lend $150 bn becuase lendable amount = Checkable Deposits-Reserves=$150 bn

Required Reserves are Reserve Ratio* Checkable deposits=20%*200bn=40bn

hence Excess Reserve=Reserves-Required Reserves=$12 bn

Bank can lend $150 bn becuase lendable amount = Checkable Deposits-Reserves=$160 bn

As Reserve ratio changes from 25% to 20% Lendable amount increases from $150bn to $160 bn hence difference of $10 bn