Assume the banking system contains the following amounts:

Total reserves $90 billion

Transaction deposits $900 billion

Cash held by public $100 billion

Reserve requirement 0.10

(a)Are the banks fully utilizing their lending capacity?

(b)What would happen the money supply initially if the public deposited another $20 billions of cash in transactions account.

(c)What would the lending capacity of the banking system be after such a portfolio switch?

(d)How large would the money supply be if the banks fully utilized their lending capacity?

(e)What three steps could the FED take to offset that potential growth in M1?