Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because they fear loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence returns. (1) Reserve Ratio, % (1) 10 (2) Checkable Deposits $ 20,000 (4) Required Reserves (5) Excess Reserves (6) Money-Creating Potential of Single Bank, (5) (7) Money-Creating Potential of Banking System $ 30,000 (3) Actual Reserves $5,000 $ 2,000 $ 3,000 $ 3,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 (4) 30 20,000 5,000 6,000 -1,000 1,000 -3,333 Instructions: In part a, enter your answer as a whole number. In part b. round your answers to 2 decimal places. In part c, enter your answer as an absolute value a. By how many percentage points does the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? 15 O percentage points b. What is the size of the monetary multiplier before the change in the reserve ratio? 10.00 O What is the size after the change? 667 O
Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because they fear loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence returns. (1) Reserve Ratio, % (1) 10 (2) Checkable Deposits $ 20,000 (4) Required Reserves (5) Excess Reserves (6) Money-Creating Potential of Single Bank, (5) (7) Money-Creating Potential of Banking System $ 30,000 (3) Actual Reserves $5,000 $ 2,000 $ 3,000 $ 3,000 (2) 20 20,000 5,000 4,000 1,000 1,000 5,000 (3) 25 20,000 5,000 5,000 (4) 30 20,000 5,000 6,000 -1,000 1,000 -3,333 Instructions: In part a, enter your answer as a whole number. In part b. round your answers to 2 decimal places. In part c, enter your answer as an absolute value a. By how many percentage points does the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? 15 O percentage points b. What is the size of the monetary multiplier before the change in the reserve ratio? 10.00 O What is the size after the change? 667 O
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Refer to the table below and assume that the Fed's reserve ratio is 10 percent and the economy is in a severe recession. Also suppose
that the commercial banks are hoarding all excess reserves (not lending them out) because they fear loan defaults. Finally, suppose
that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once
the economy begins to recover and confidence returns.
(1)
Reserve
(2)
Checkable
Deposits
$ 20,000
(4)
Required
Reserves
(5)
Excess
(6) Money-Creating
Potential of Single Bank, =
(5)
$ 3,000
(7) Money-Creating
Potential of Banking
System
$ 30,000
(3) Actual
Reserves
Ratio, %
(1) 10
Reserves
$5,000
$ 2,000
$ 3,000
(2) 20
20,000
5,000
4,000
1.000
1,000
5,000
(3) 25
20,000
5,000
5,000
(4) 30
20,000
5,000
6,000
-1,000
-1,000
-3,333
Instructions: In part a, enter your answer as a whole number. In part b. round your answers to 2 decimal places. In part c. enter your
answer as an absolute value
a. By how many percentage points does the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves?
15 O percentage points
b. What is the size of the monetary multiplier before the change in the reserve ratio?
10.00 O
What is the size after the change?
6.67 O
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