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 = ?
(1/.2)* 40 = $200 billion
To determine how much the banks could increase their lending activity, we need to calculate the excess reserves held by the banks. Excess reserves are the reserves held by banks above the required reserve ratio.
1. Start by calculating the required reserves:
Required Reserves = Transactions deposits * Reserve requirement
Required Reserves = $800 billion * 0.20
Required Reserves = $160 billion
2. Next, calculate the excess reserves:
Excess Reserves = Total Reserves - Required Reserves
Excess Reserves = $200 billion - $160 billion
Excess Reserves = $40 billion
So, the banks could increase their lending activity by up to $40 billion based on the given data.