1. If the total reserves of a commercial banking system are $100 billion and the required reserve ratio on deposits is 10%, what is the maximum level of deposit liabilities they can legally hold? (Show all work). /2

2. Suppose the Central Bank of Narnia purchases $20 million of government securities from the Narnianpeople. Further suppose that the central bank pays for these securities by issuing cheques, which the sellers deposit in their chequing accounts in the commercial banking system.

3. Fill in the Balance Sheet (found below) for the Central Bank of Narnia and the Balance Sheet for the Chartered Bank System of Narnia (found below) to show the effects of this transaction. Assume that required reserve ratio on deposits is 10%.

Central Bank of Narnia- Balance Sheet 1

Assets	$	Liabilities	$

Chartered Bank System of Narnia- Balance Sheet 1

Assets	$	Liabilities	$

b. As a direct consequence of the transaction in question #2, "by what amount does Narnia's money supply increase?"

c. If, prior to this transaction, the Chartered Bank System of Narnia had no excess reserves and if their required reserve ratio is 10%, calculate the following:

i) The amount of excess reserves now

ii) The size of the money multiplier

d. fill in three Balance Sheets (found below) to show the additional changes that would result if the chartered bank system decided to lend all their newly acquired excess reserves.

Chartered Bank System of Narnia

Assets	$	Liabilities	$

Chartered Bank System of Narnia

Assets	$	Liabilities	$

Chartered Bank System of Narnia

Assets	$	Liabilities	$