The accompanying table is the consolidated balance sheet for the commercial banking system. All figures are in billions. Assume that the required reserve ratio is 10 percent. The maximum amount by which this commercial banking system can expand the supply
$900,000 billion.
The multiple by which the commercial banking system can expand the supply of money is equal to
the reciprocal of the reserve ratio.
Banks' borrowed funds come mostly from
issuing bonds and accepting deposits.
Leverage" in finance refers to the
use of borrowing money in order to magnify returns from an investment.
The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 20 percent, the money-creating potential of the entire banking system is
$10,000.
If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will
decrease.
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. If the commercial banking system actually loans out the maximum amount it is a
to zero.
Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve. If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be
decreased by $40 billion.
The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of
$40,000.
One way to enhance the stability of the banking system is to
require higher bank capitalization, or net worth.
If the required reserve ratio were 15 percent, the value of the monetary multiplier would be
6.67.
What percentage of the money that a typical modern bank invests comes from borrowing?
about 95 percent
Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by
$900.
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. After the deposit of $10 billion of new currency, the maximum amount by which this commer
$90 billion.
If the monetary authorities want to reduce the monetary multiplier, they should
raise the required reserve ratio.
If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is
5
Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money that the banking system could create is about
$660 million.
Other things equal, if the required reserve ratio was lowered,
the size of the monetary multiplier would increase.
The use of high leveraging by banks leads to the banking system's
instability.
The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. The monetary multiplier is
5.00.
Refer to the accompanying balance sheet for the First National Bank. Assume the reserve ratio is 15 percent. If the balance sheet was for the whole commercial banking system rather than a single bank, then loans and deposits could expand by a maximum of a
$213,333.
Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of
$100,000.
The greater the required reserve ratio, the
lower is the monetary multiplier.
If the monetary multiplier is 6, then the reserve ratio must be
0.167.
If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetary multiplier for the banking system will be
4
If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system,
m = 1/R.
A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are
$50,000 and $250,000, respectively.
Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. If commercial bankers decide to hold additional excess reserves equal to 7 per
5.26.
The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of
The reserve ratio
Maximum checkable-deposit expansion in the banking system is equal to
excess reserves times the monetary multiplier.