Question:

Assume that the following data describe the condition of the commercial banking system:

Total Reserves: $80 billion

Transactions deposits: $800 billion

Cash held by public: $100 billion

Reserve requirement: 0.10

(a) How large is the money supply (M1)?

(b) How large would the money supply be if the banks fully utilized their lending capacity?

(c) What three methods could the Fed take to offset any potential growth in M1 money supply?