Assume that the following data describe the current condition of the commercial banking system:
ValueTotal reserves:$ 90 billionTransactions deposits:$ 750 billionCash held by public:$ 400 billionRequired 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)?
$ 1150 Numeric ResponseEdit Unavailable.1150correct.billion
How large are excess reserves?
$ 15 Numeric ResponseEdit Unavailable.15correct.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 not change Correct.
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
What three steps could the Fed take to offset this potential growth in M1?
Increase Correctreserve requirements
Increase Correctthe discount rate
Sell Correctbonds
By what percentage did M1 change?
%
If the Fed had used a fixed rule of 3 percent growth of the money supply (M1), how large would M1 have been in 2004?
$ billion