Ch14AnswersRev - CHAPTER 14 MONETARY POLICY PROBLEMS 1...

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MONETARY POLICY PROBLEMS 1. Suppose the following data apply: a. How large is the money supply as measured by M 1 ? b. How much excess reserves are there? c. What is the money multiplier? d. What is the available lending capacity? a. The basic money supply (M1) is transaction account balances and cash. Assuming that the total bank deposits are in transactions accounts the money supply is \$110 billion. b. If the required reserve ratio is 0.04, then banks are required to keep \$4 billion in reserve (\$100 billion X 0.04). Since banks have total reserves of \$5 billion, there is \$1 billion in excess reserves. c. The money multiplier is calculates as 1/(required reserve ratio). Thus, the money multiplier is 1/0.04 = 25. d. Since there are \$1 billion in excess reserves and the money multiplier is 25, there is \$25 billion in available lending capacity. 2. Assume that the following data describe the condition of the commercial banking system: Total Reserves: \$200 billion Transactions deposits: \$800 billion Cash held by public: \$100 billion Reserve requirement: 0.20 a. How large is the money supply (M1)? b. Are the banks fully utilizing their lending capacity? Explain. Total Bank Reserves \$5 billion Stocks held by public \$140 billion Total Bank Deposits \$100 billion Gross Domestic Product \$5 trillion Cash Held by the Public

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