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macroeconomics bank lending and the money supply2

macroeconomics bank lending and the money supply2 - III...

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Unformatted text preview: III. Lending by a Banking System The lending ability of a banking system differs from the lending ability of an individual bank. Lending by an individual bank generally results in a loss of that bank's reserves as the cash is spent and redeposited into a different bank. On the other hand, reserves tend to be retained within a banking system as the system lends. As the cash is withdrawn from one bank, it is spent and redeposited into another bank within the system. Assume that the legal reserve requirement imposed on banks is 20%. Use the consolidated balance sheet of the banking system below to answer the following questions. Assets BANKING SYSTEM Liabilities A “06 Reserves $300 Demand Deposits $800\ QR ’- ‘ _, Loans 500 » ‘ rc V ‘ Total @800 Total $800 A. The excess .reserves of the banking system are currently 11: MO B. If ther are no cash holdings in the money supply, the money supply (M1) is currently 35} $60 C. The banking syst c n increase its loans by a maximum of am a > 33505 - D. Assuming that the banking system becomes "loaned-out" and there are no additional reserves, illustrate the consolidated balance sheet of the loaned—out system in the following T—account. "LOANED-OUT" Assets BANKING SYSTEM Liabilities Reserves $30015 Demand Deposits (I 5 OD Loans '3! 0° Total lSOO E. Assuming there are no cash holdings in the money supply and the banking system is "loaned-out," the money supply would be \%00 F. Suppose the Board of Governors of the Federal Reserve lowers the legal reserve requirement to 10%. 1. Assuming no change in reserves of the banking system, illustrate the consolidated balance sheet the loan—out system with the 10% reserve requirement. "LOANED-OUT” Assets BANKING SYSTEM Liabilities Reserves $300 Demand Deposits S 00 0 Loans gq OD Total 32:20 Total $120 2. Assuming no cash holdings in the money supply and the banking system is loaned-out, the money supply is (500 D ...
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