Answer the indicated question on the basis of the information in Table 14.1.Each question is based on the original balance sheet.

-In Table 14.1,if the Fed changes the required reserve ratio to 5 percent,the lending capacity of the banking system will eventually:
A) Rise by $800 billion.
B) Fall by $800 billion.
C) Rise by $40 billion.
D) Fall by $40 billion.

Question

Answer the indicated question on the basis of the information in Table 14.1.Each question is based on the original balance sheet.
 
-In Table 14.1,if the Fed changes the required reserve ratio to 5 percent,the lending capacity of the banking system will eventually:
A) Rise by $800 billion. 
B) Fall by $800 billion. 
C) Rise by $40 billion. 
D) Fall by $40 billion.

Quizplus · Accepted Answer

When the Fed lowers the required reserve ratio, it increases the amount of money that banks can lend out. If the required reserve ratio is decreased to 5%, banks only need to keep 5% of deposits as reserves instead of a higher percentage. This reduction in reserve requirements increases the lending capacity of the banking system. The specific increase in lending capacity can be calculated using the money multiplier formula, which is 1/required reserve ratio. If the ratio is reduced to 5% (or 0.05), the multiplier increases, leading to a significant increase in the lending capacity of the banking system. The exact amount of increase (e.g., $800 billion) would depend on the initial conditions and the total amount of deposits in the banking system, which are not provided in the question. However, the concept is that lowering the reserve requirement increases the potential for lending and money creation within the economy.

Answer the Indicated Question on the Basis of the Information