Question

6. a. Explain how and why a bank’s excess reserve ratio is related to the business cycle.

b. Compare and contrast the LVTS and the ACSS

c. Suppose that all banks in the economy have a desired reserve ratio of 4%, choose to hold 2% of deposits as excess reserves, and that individuals in the economy hold 3% of money as cash. Calculate the deposit multiplier for a new injection or withdrawal from bank reserves. Show your work here .

Answer 1

c) Deposit multiplier = 1 / Desired Reserve Ratio

Deposit multiplier = 1/4%

Deposit Multiplier = 100/4 = 25

a) Excessive reserves are the money that the money banks keep with themselves as the loans and money that is banks are used for daily activities. But sometimes the money loaned out will not be again redeposited in the banks as it is supplied thus the banks use this reserves in many purposes such as any sudden activities where bank needs money for operations. So they use these reserves as the money thus it is again money supplied into the real world thus making it a part of business cycle.

b)

LVTS	ACSS
It process large value payments which are done continously throughout the day.	It clears retail payments, small value electronic payments, pre authorized debts and credits
It is used transfer of payments	It is used for the clearance of exchnaged items
Only large money transactions which are of high value take place	Exchnage of items takes place it can be money or any item with proper clearance and verification