5. Use the information below to answer question 5:

Commercial Banks Federal Reserve
Assets Liabilities. Assets Liabilities
Reserves 400 Deposits 2000 Securities 900 Currency 500
Loans 1,600 Equity 500 Reserves 400
Securities 500

Public
Assets Liabilities.
Deposits 2,000 Loans 1,600
Currency 500 Net Worth 900

Assume that the required reserve ratio (ratio of reserves to deposits) is .
1 Calculate the following:
(a) excess reserves
(b) the monetary base (B)
(c) the money multiplier

(a) Excess reserves = 200

(b) Monetary base (B) = 900

(c) Money multiplier = 10

Explanation:

Assuming that the required reserve ratio (missing in the question) is 0.1:

(a) Excess reserves = Reserves - Required reserves

Reserves = 400

Required reserves = Deposits x Required reserve ratio

                               = 2000 x 0.1

                               = 200

Hence, Excess reserves = 400 - 200

                                        = 200

(b) Monetary base (B) = Reserves + Currency

                                    = 400 + 500

                                    = 900

(c) Money multiplier = 1 / Required reserve ratio

                                 = 1 / 0.1

                                 = 10

a. 200

b.900

c. 10

Explanation:

a)Excess reserves = total reserves – required reserves

                                     = 400 (given) – (deposits* required reserve ratio of which is usually 10%, so we assume it is 10%)

                                     = 400 – (2000* 10%)

                                     = 400-200

Excess reserves          = $200

b)Monetary base   = total reserves + currency  

                                   = 400 + 500 (given)

Monetary Base (B)     = $900  

c)The money multiplier is calculated as 1 divided by the required reserve ratio

Money multiplier = 1 / 10%

                             = 10

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