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ECO 2023 – Assume the banking system contains

Question

Assume the banking system contains the following amounts:

Total reserves $90 billion

Transactions deposits $900 billion

Cash held by public $100 billion

Reserve requirement 0.10

(a) Are the banks fully utilizing their lending capacity?

  • Yes
  • No

(b) What would happen to the money supply initially if the public deposited another $20 billion of cash in transactions accounts?

  • Decrease by $30 billion
  • No change
  • Increase by $30 billion
  • Not enough informatiion

Instructions: Enter your responses as a whole number.

(c) What would the lending capacity of the banking system be after such a portfolio switch?

  • ___$ billion

(d) How large would the money supply be if the banks fully utilized their lending capacity?

  • _____$ billion

(e) What three steps could the Fed take to offset that potential growth in M1?

  • Raise the reserve requirement, raise the discount rate, and use open market sales.
  • Raise the reserve requirement, raise the discount rate, and use open market purchases.
  • Lower the reserve requirement, raise the discount rate, and use open market sales.
  • Lower the reserve requirement, raise the reserve requirement, and use open market sales.

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