Reference no: EM131480318

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.