The combined balance sheet of all the commercial banks in the economy is as follows (in billions of dollars): Assets : Reserves =25 Government Securities = 75 Loans =150 Liabilities: Deposits=250 a) Assume this bank has no excess reserves, what is the reserve requirement? b) If the Fed purchases securities of $25 billion, how much in excess reserves do the banks have immediately after this transaction? c) By how much would the money supply increase if the banks fully utilized their lending capacity capacity and all money lent was redeposited into the banking system? 

(a) Computation of Reserve Requirement:

Given,

Reserves = $25 billion

Deposits = $250 billion

Reserve Requirement = Reserves/Deposits

= $25 billion/$250 billion

Reserve Requirement = 0.10 or 10%

(b) The Fed purchases securities of $25 billion. The Fed pays in terms of reserves for this securities to the banks.

So, banks will get $25 billion in reserves.

The banks will have $25 billion in excess reserves immediately after this transaction.

(c) Computation of Increase in Money Supply:

Increase in Money Supply = Excess Reserves with Banks * [1/Reserve Requirement]

= $25 billion * [1/0.10]

= $25 billion * 10

Increase in Money Supply = $250 billion