Question

In: Economics

State whether the following actions increase, decrease or do not change the total deposits created by...

  1. State whether the following actions increase, decrease or do not change the total deposits created by the banking system. (5 pts each, Total : 25 pts):

  1. Central bank made an open market purchase of 1 Million TL.

  1. Central bank increased the required reserve ratio.

  1. The recent financial panic caused firms to increase their excess reserves.

  1. Central bank provided 1 Million TL worth of loans to the banking system.

  1. The recent financial panic caused agents to increase their currency to deposit ratio

Solutions

Expert Solution

(a)

Central bank made an open market purchase of 1 million TL.

When central bank make open market purchase then reserves with bank increases. This induces banks to lend more and thereby create more deposits and increase the money supply.

So,

This action increases the total deposits created by the banking system.

(b)

Central bank increased the required reserve ratio.

An increase in required reserve ratio compelled banks to hold greater quantity of reserves as required and thus lendign capacity of banks decreases leading to decrease in the money supply and creation of new deposits.

So,

This action decreases the total deposits created by the banking system.

(c)

The recent financial panic caused firms to increase their excess reserves.

As banks will increase their excess reserves, their lending capacity will decrease. This will reduce the money creation and creation of new deposits.

So,

This action decreases the total deposits created by the banking system.

(d)

Central bank provided 1 million TL worth of loans to the banking system.

Bank will utilize these loans to make further loans. This will lead to creation of more deposits.

So,

This action increases the total deposits created by the banking system.

(e)

The recent financial panic caused agents to increase their currency deposit ratio.

Increase in currency deposit ratio will result in a decrease in the value of money multiplier and thus reduce the deposit expansion in the economy.

So,

This action decreases the total deposits created by the banking system.

Rahul Sunny answered 7 months ago
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