Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves.

Instructions: In part a, enter your response as a percentage rounded to one decimal place. For all other parts, enter your responses as a whole number.

a. What is the reserve requirement?

%

b. Suppose the reserve requirement is changed to 5 percent. Reconstruct the balance sheet of the total banking system after all banks have fully utilized their lending capacity.

Assets (in Billions)		Liabilities (in Billions)
Total reserves	$30	Transactions account deposits
Securities	$190		$400
Loans	$380
Total assets	$600	Total liabilities	$400

Assets (in Billions)		Liabilities (in Billions)
Total reserves	$30	Transactions account deposits
Securities	$190		$400
Loans	$180
Total assets	$400	Total liabilities	$400

c. By how much has the money supply changed as a result of the lower reserve requirement (step b)?

$ billion

d. Now suppose the Fed buys $10 billion of securities directly from the banks. What will the banks books look like immediately after this purchase but before the banks make any additional loans?

e. How much excess reserves do the banks have now?

$ billion

f. By how much can the money supply now increase?

$ billion