Below is a T-account for First Bank of Dub City (FBDC). The reserve requirement is 20%. First
Question:
Below is a T-account for First Bank of Dub City (FBDC). The reserve requirement is 20%.
First Bank of Dub City | |||
Assets | Liabilities | ||
Required Reserves | $20 million | Deposits | $100 million |
Loans | $80 million | ||
a. Suppose a depositor withdraws $0 million in cash from her account. If FBDC decides to restore its reserve ratio by reducing the amount of loans outstanding, show its new T-account.
b. If now, the central bank increases the reserve requirement to 5%, rewrite the T-account so that FBDC meets the reserve requirement by reducing the amount of loans.
c. If the reserve requirement in the banking system is 25% and the central bank buys $50 million worth of bonds from the public, what is the minimum and maximum change in the money supply?
d. The central bank wants inflation to be 2%. Assume velocity is stable. If real GDP (Y) is growing at 1.5%, by what percentage should the central bank increase the money supply?
e. If your recommended percentage increase in the money supply amounted to $100 million and the reserve ratio is 2%, then how many dollars’ worth of government bonds should the central bank buy from the public?
f. If all the proceeds from the purchase of government bonds are deposited in Moja Bank, a commercial bank, show how Moja’s T-account will change once its excess reserves are converted to loans.
g. Assume loans at Moja Bank are deposited in Mbili Bank, a commercial bank. Show the T-account for Mbili Bank once its excess reserves are converted to loans.
h. Now assume loans at Mbili Bank end up being deposited at Tatu Bank, a commercial bank. Show the T-account for Tatu Bank once its excess reserves are converted to loans.
Expert Answer:
a Suppose a depositor withdraws 0 million in cash from her account If FBDC decides to restore its reserve ratio by reducing the amount of loans outstanding show its new Taccount ANSWER First Bank of D... View the full answer
