Question

Use the following information about Macroland to answer this question

Bank deposits at the central bank	$100 million
Currency in bank vaults	$50 million
Currency held by the public	75 million
Chequeable deposits	600 million
Traveller cheques	5 million

a) What are bank reserves equal to in Macroland?

b) Suppose banks hold no excess reserves in Macroland? What is required reserves ratio given the information in this table?

c) If the public does not change its currency holdings, what will happen to the level of chequeable deposits in Macroland, relative to their initial level, if the central bank of Macroland purchases $ 10 million worth of treasury bills in the open market?

d) If the public does not change its currency holdings, what will happen to the level of chequeable deposits in Macroland, relative to their initial level, if the central bank of Macroland sells $ 5 million worth of treasury bills in the open market?

Answer 1

Sol :

a) Bank Reserves =

Reserves held by bank with Central bank + Vault cash by the bank

So, Reserve of bank with Central bank = $ 100 million

Vault cash of bank = $50 million.

Bank Reserves = $100 + $50 =$150 million

b) Required Reserve ratio = (Reserve/depsoits) x 100

= ($150/600) x 100

= 25%

c) If the central bank purchases the Bonds of $10 million then ,

Deposits will increases by $10 million

and , also reserves will increases by 25% of $10 million .

(As, people is not changing their currency holding , so excess money that they are getting will be depositing in the bank in form of chequable deposits.)

d) if the central bank sold the bonds of $5 million in the open market then ,

Chequable deposits will Decreases by $ 5 million.

(as, individual want money to but the bonds, since they are not changing their currency holding , so they must have been withdrawing money from the bank.)

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