Answered: Consider an economy where the monetary…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider an economy where the monetary base is k24 000, while the total deposits are k56 000. Bank of Zambia has put a Statutory reserve ratio that allows this banking system to loan out k50 400 from these deposits. The public on the other hand has decided to deposit only 20% of their money, while keeping the rest in currency form. Further, excess reserves in this banking system is 30%.
Use the money multiplier model to determine the money supply in circulation.
ii) what would happen to the money supply in circulation if the reserve ratio was put at 5% and excess reserves at 35%.
iii)Explain the mechanism through which money supply changed from before and after the changes in reserve ratio and excess reserves.

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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