Question

In: Economics

QUESTION 6 Consider an economy where banks keep 25% of deposits as reserves. Currency is 50...

QUESTION 6

  1. Consider an economy where banks keep 25% of deposits as reserves. Currency is 50 billion pesos, which constitutes 10% of the monetary base.


        (a) Calculate the monetary base.
        (b) Calculate the money supply.
        (c) If the central bank requires a reserve-deposit ratio of at least 10%, calculate banks' excess reserves.
        (d) If the currency-deposit ratio increases by 3 percentage points, calculate the resulting money supply assuming that the monetary base and the reserve-deposit ratio stay the same.
        (e) In answering this question, assume that the change in the currency-deposit ratio described in (d) never happened. If the central bank buys 10 billion pesos worth of securities, calculate the percentage change in the monetary base and the percentage change in the money supply assuming that the currency-deposit ratio and the reserve-deposit ratio stay unchanged.

Solutions

Expert Solution

Answer 6:

a)

Monetary Base=500 billion pesos.

Explanation: Given that the currency is 50 billion pesos and is 10% of monetary base. Monetary base is 10 times currency=10*50billion pesos.

b)

Money supply=Currency+Deposits

where Deposits=4*Reserves.(Given that reserves are 25% of deposits)

Reserves=Monetary base-Currency=500 billion pesos-50 billion pesos=450 billion pesos.

Deposits=4*450 billion pesos=1800 billion pesos.

Money supply=50 billion pesos+1800 billion pesos=1850 billion pesos.

c)

If required reserve ratio is 10%, then Bank's excess reserve=Actual reserve-Required reserve=450 billion pesos-(10%*1800 billion pesos)=450 billion pesos-180 billion pesos=270 billion pesos.

d)

Present currency deposit ratio=50 billion pesos/1800 billion pesos*100=2.77%.

Currency deposit ratio after increase=2.77%+3%=5.77%.

Given that the monetary base and the reserve deposit ratio remains same,

Monetary base=Currency+Reserves=Currency+25% of deposits=500 billion pesos.

Currency/Deposits=5.77%. So, Deposits=Currency/5.77%

Currency+ 10%*Currency/5.77%=Currency[1+(25/5.77)] =500 billion pesos

or

Currency=500 billion pesos/[1+(25/5.77)]=94 billion pesos.

Deposit=Currency/5.77%=94 billion pesos/0.0577=1625 billion pesos.

Resulting money supply=94 billion pesos+1625 billion pesos=1719 billion peos.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

U.S. Economy Data Category Value Total Reserves (private banks) $100 Billion Currency (firms, households) $50 Billion...
U.S. Economy Data Category Value Total Reserves (private banks) $100 Billion Currency (firms, households) $50 Billion Value of Euros in the U.S. (private banks, firms, households) $1 Billion Gov’t bonds (private banks, firms, households) $30 Billion Demand deposits (private banks) $1 Trillion Certificates of Deposit, CDs (private banks) $10 Billion Reserve requirement on demand deposits .10 Let’s say the Federal Reserve buys $20 Billion in bonds from private banks What is the total amount (in $) of reserves that banks...
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits.
6. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table A higher reserve requirement is associated with a _______ money supply.Suppose the Federal Reserve wants to increase...
  Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A...
  Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves? Selected Answer: c. $27,000 Answers: a. $9,000   b. $26,190   c. $27,000    
consider the following data: currency 850 billion checkable deposits 700 billion bank reserves. 700 billion Calculate...
consider the following data: currency 850 billion checkable deposits 700 billion bank reserves. 700 billion Calculate ghe values of currency-to- deposit ratio, the ratio of total reserves to deposits, the monetary base, the money multiplier and the M1 money supply
Using a required reserve ratio of 10% and if banks keep no excess reserves, which of...
Using a required reserve ratio of 10% and if banks keep no excess reserves, which of the following scenarios produces a larger increase in the money supply, explain why. a) Someone takes $1000 from under his or her mattress and deposits it into a checking account. b) The Fed purchases $1,000 in government securities from a commercial bank.
Assume that no banks hold excess reserves and the public holds no currency (which implies that...
Assume that no banks hold excess reserves and the public holds no currency (which implies that ER = C = 0). If a bank sells a $100,000 security to the FED, explain what happens to this bank (Bank A) and two additional steps (or two additional banks, Bank B and Bank C) in the deposit expansion process assuming a 10% reserve requirement. Put differently, what will be the change in deposits for the first bank (ΔDA), the second bank (ΔDB),...
Assume that banks do not hold excess reserves and that households do not hold currency, so...
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 20 ______ _____ 10 ______ ______ A higher reserve requirement is associated with a (smaller or larger)...
Assume that banks do not hold excess reserves and that households do not hold currency, so...
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25       10       A lower reserve requirement is associated with a   money supply. Suppose...
Assume that banks do not hold excess reserves and that households do not hold currency, so...
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 5       10       A lower reserve requirement is associated with a   money supply. Suppose...
If the public decides to hold more currency and fewer deposits in banks, what happens to...
If the public decides to hold more currency and fewer deposits in banks, what happens to bank reserves and the money supply after all adjustments are made?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT