Assume that the following data describe the current condition of the commercial banking system:

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Total Reserves: $40 billion

Transactions Deposits: $750 billion

Cash held by Public: $450 billion

Required Reserved Ratio: 0.05

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a. How large is the money supply (M1)? ____$1,200____ Billion

b. Are the banks fully utilizing their lending capacity?

Banks currently have _________$2.5____ Billion in excess reserves.

Now assume that the public deposited another $10 billion in cash in transactions accounts.

c. What would happen to the money supply initially ( before any lending take place)?

Assuming the 10 billion in cash is not new money in the system, M1 will: ______Not Change____

d. How much would the total lending capacity of the banking system be after this portfolio switch? ____________Billion

e. How large would the money supply be if the banks fully utilize their lending capacity? ________________Billion