Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will

Question:

Suppose a banking system with the following has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their to cover inadequate reserves.

Assets Liabilities (in Billions) (in Billions) $400 $ 30 Transactions accounts Total reserves Securities $190 $180 Loans

(a) What is the reserve requirement?

(b) Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity.

(d) Suppose the Fed now buys $10 billion of securities directly from the banks. What will the banks€™ books look like after this purchase?

(e) How much excess reserves do the banks have now?

(f) By how much can the money supply now increase?

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