Assume that the following data describe the condition of the banking system:
Total reserves $200 billion
Transactions deposits $800 billion
Cash held by public $400 billion
Reserve requirement 0.20
By how much could the banks increase their lending activity?
$ billion = ?
To determine how much banks can increase their lending activity, we need to calculate the excess reserves the banks currently have.
The formula to calculate excess reserves is:
Excess Reserves = Total Reserves - Reserve Requirement
Given that the total reserves are $200 billion and the reserve requirement is 0.20 (20%), we can calculate the excess reserves as follows:
Excess Reserves = $200 billion - ($800 billion * 0.20)
First, we multiply $800 billion by 0.20 to find the amount of reserves that banks are required to hold.
Reserves Required = $800 billion * 0.20 = $160 billion
Next, we subtract the reserves required from the total reserves to find the excess reserves:
Excess Reserves = $200 billion - $160 billion = $40 billion
Therefore, the banks can increase their lending activity by $40 billion.