Question 2 (25 marks total) Shown below is the T-account of one bank in the country...

 

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Question 2 (25 marks total) Shown below is the T-account of one bank in the country of Imaginia. This bank is holding 2.5% excess reserves, i.e., is holding 2.5% of its deposits as reserves in excess of the reserves required by the central bank of Imaginia. Reserves Loans Assets $ 60,000 $540,000 Deposits Liabilities $600,000 a) What is the reserve ratio? What is the reserve requirement? According to the conditions above, calculate the reserve ratio and the reserve requirement. (6 marks) b) Assume all other banks holds only the required reserves, and people holds no currency. How much does the money supply ultimately increase if this one bank decides to lend out its excess reserves? Explain with supporting calculations. (6 marks) c) After what happened in part b), suppose that central bank conducts a $20,000 open- market purchase of government bonds. What are the largest and smallest possible increase in the money supply as a result of this open-market operation? Explain with supporting calculations. (7 marks) d) Explain whether the central bank can precisely control the money supply by the open- market operations or other monetary tools. Give reasons in your explanation. (6 marks) Question 2 (25 marks total) Shown below is the T-account of one bank in the country of Imaginia. This bank is holding 2.5% excess reserves, i.e., is holding 2.5% of its deposits as reserves in excess of the reserves required by the central bank of Imaginia. Reserves Loans Assets $ 60,000 $540,000 Deposits Liabilities $600,000 a) What is the reserve ratio? What is the reserve requirement? According to the conditions above, calculate the reserve ratio and the reserve requirement. (6 marks) b) Assume all other banks holds only the required reserves, and people holds no currency. How much does the money supply ultimately increase if this one bank decides to lend out its excess reserves? Explain with supporting calculations. (6 marks) c) After what happened in part b), suppose that central bank conducts a $20,000 open- market purchase of government bonds. What are the largest and smallest possible increase in the money supply as a result of this open-market operation? Explain with supporting calculations. (7 marks) d) Explain whether the central bank can precisely control the money supply by the open- market operations or other monetary tools. Give reasons in your explanation. (6 marks)

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Step 12 Given 25 of deposits is excess reserve Total reserve60000 Total deposit 600000 Reserve ratio ... View the full answer