Assume that the following data describe the current condition of the commercial banking system: Value Total reserves: $ 90 billion Transactions deposits: $ 750 billion Cash held by public: $ 400 billion Required reserve ratio: 0.10 Instructions: Enter your responses as a whole number. In part b, round your response to one decimal place. How large is the money supply (M1)? $ billion How large are excess reserves? $ billion Now assume that the public transfers $40 billion in cash into transactions accounts. What would happen to the money supply initially (before any lending takes place)? Assuming the $40 billion in cash is not new money in the system, M1 will . How much would the total lending capacity of the banking system be after this portfolio switch? $ billion How large would the money supply be if the banks fully utilized their lending capacity? $ billion
Added by Mariah C.
Step 1
The money supply (M1) is the sum of transactions deposits and cash held by the public. So, M1 = $750 billion + $400 billion = $1150 billion. Show more…
Show all steps
Your feedback will help us improve your experience
Lottie Adams and 62 other Microeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
Assume that the following data describe the current condition of the commercial banking system. Total reserves: $50 billion Transactions deposits: $800 billion Cash held by public: $350 billion Required reserve ratio: 0.05 a. How large is the money supply (M1)? billion b. Are the banks fully utilizing their lending capacity? Banks currently have billion in excess reserves. Now assume that the public deposited another $20 billion in cash in transactions accounts. c. What would happen to the money supply initially (before any lending takes place)? Assuming the $20 billion in cash is not new money in the system, M1 will d. How much would the total lending capacity of the banking system be after this portfolio switch? billion e. How large would the money supply be if the banks fully utilized their lending capacity? billion f. What three steps could the Fed take to offset the potential growth in M1? reserve requirements, the discount rate, and bonds
Rashmi S.
Given the following data, answer four questions about the money supply and the money multiplier. Value Total reserves: $ 30 billion Transactions deposits: $ 500 billion Cash held by public: $ 200 billion Bonds held by public: $ 300 billion Stocks held by public: $ 100 billion Gross domestic product: $ 8 trillion Interest rate: 8 percent Required reserve ratio: 0.05 Instructions: In parts a and b, enter your responses as a whole number. In parts c and d, round your responses to two decimal places. How large is the money supply (M1)? $ billion How much excess reserves are there? $ billion What is the money multiplier? What is the available lending capacity of the banking system?
Lottie A.
Suppose the Federal Reserve decided to sell $25 billion worth of government securities in the open market. a. By how much will M1 change initially if the entire $25 billion is withdrawn from transactions accounts? Note: If M1 decreases, be sure to include a negative sign (-) in front of your answer. M1 will initially change by: -$25 billion. b. How will the lending capacity of the banking system be affected if the reserve requirement is 5 percent? Note: If lending capacity decreases, be sure to include a negative sign (-) in front of your answer. Total lending capacity will change by: -$500 billion. c. How will banks induce investors to respond to this change in lending capacity? If the money supply increases, interest rates decrease and investors will want to borrow more funds. If the money supply decreases, interest rates will increase and investors will want to borrow fewer funds.
Recommended Textbooks
Principles of Economics
Principles of Microeconomics for AP® Courses
Economics
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD