Refer to Table 16.2 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 of their fear of 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 is restored. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? What would be the size of the monetary multiplier before and after the change in the reserve ratio? By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio?

Table 16.2:

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(0) Reserve Ratio, % (1) 10 (2) 20 (3) 25 (4) 30 (2) Checkable Deposits $20,000 20,000 20.000 20.000 (3) Actual Reserves $5000 5000 5000 5000 (4) Required Reserves $2000 4000 5000 6000 (5) Excess Reserves, (3)-(4) $ 3000 1000 0 -1000 Money-Creating Potential of Single Bank,- (5) $ 3000 1000 0 -1000 (7) Money-Creating Potential of Banking System $30,000 5000 0