Total reserves: Transactions deposits: Cash held by public: Required reserve ratio: Value $ 40 billion $ 750 billion $ 450 billion 0.05 Instructions: Enter your responses as a whole number. In part b, round your response to one decimal place. a. How large is the money supply (M1)? $ 1200 billion b. How large are excess reserves? $ 2.5 billion Now assume that the public transfers $10 billion in cash into transactions accounts. c. What would happen to the money supply initially (before any lending takes 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 utilized their lending capacity? EA $ billion Suppose the Federal Reserve decided to sell $15 billion worth of government securities in the open market. Instructions: Enter your responses as a whole number. a. By how much will M1 change initially if the entire $15 billion is withdrawn from transactions accounts? M1 will initially decrease by $ 15 billion. b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent? Total lending capacity will decrease by $ 2 billion. c. How will banks induce investors to respond to this change in lending capacity? If the money supply increases, interest rates will decrease and investors will want to borrow more funds. If the money supply decreases, interest rates will increase and investors will want to borrow fewer funds. NEWS WIRE: RESERVE REQUIREMENTS China Cuts Reserve Requirements Beijing-China's central bank reduced the amount of reserves commercial banks are required to hold, freeing up money for lending in the latest easing measure to shore up the world's second-largest economy. The People's Bank of China's percentage point cut in the reserve requirement lowers the reserve-requirement ratio, or RRR, to 11.5 percent for large banks. The move frees up about US$79 billion in additional funds that banks can now lend. Source: News accounts of March 2020. Instructions: Round your responses to one decimal place. What was the money multiplier in China a. before the change in reserve requirements? 1 b. after the change in reserve requirements? 8.7 POLICY PERSPECTIVES If the price level increases by 0.2 percent for every $100 billion increase in the money supply, by how much might prices rise if the Fed increases total reserves by $200 billion and the reserve requirement is 0.10? Instructions: Round your response to two decimal places. 4.0