Question

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions.

Assets Liabilities + Net Worth
Reserves $120,000 Checkable Deposits $300,000
Loans 140,000 Stock Shares 200,000
Securities 40,000
Property 200,000

After the deposit of $10 billion of new currency, the maximum amount by which this commercial banking system can expand the supply of money by lending is:

a. $120,000 billion.
b. $300,000 billion.
c. $600,000 billion.
d. $900,000 billion.

Answer 1

Answer:

d. $900,000 billion.

Explanation:

The computation of total money supply is shown below:

But before that first we have to find out the required reserves, excess reserve and the multiplier which are given below:

Required reserve is

= $300,000 × 10%

= $30,000

Now the excess reserve is

= $120,000 - $30,000

= $90,000

And, the multiplier is

= 1 ÷ 10%

= 10

So, total money supply is

= $90,000 × 10

= $900,000 billions