KEY QUESTION Suppose the simplified consolidated balance sheet shown below is for the entire commercial banking system.

Question:

All figures are in billions. The reserve ratio is 25 percent.

a. What amount of excess reserves does the commercial banking system have? What is the maximum amount the banking system might lend? Show in column 1 how the consolidated balance sheet would look after this amount has been lent. What is the monetary multiplier?

b. Answer the questions in part a assuming the reserve ratio is 20 percent. Explain the resulting difference in the lending ability of the commercial banking system.

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