Macroeconomics 19th Edition by Campbell McConnell , Stanley Brue,Sean Flynn

Exercise 4

Refer to TablE₃3.2 and assume that the Fed's reserve ratio iS₁0 percent and the economy is in a severe recession. Also suppose that the commercial banks are hoarding all excess reserves (not lending them out) because of their fear of loan defaults. Finally, suppose that the Fed is highly concerned that the banks will suddenly lend out these excess reserves and possibly contribute to inflation once the economy begins to recover and confidence is restored. By how many percentage points would the Fed need to increase the reserve ratio to eliminate one-third of the excess reserves? What would be the size of the monetary multiplier before and after the change in the reserve ratio? By how much would the lending potential of the banks decline as a result of the increase in the reserve ratio?