The ABC bank has a deposit base on which it holds excess reserves of $42 Million at a reserve rate that relates to a money multiplier (MM) of 5. On January 2, 2010, Mwen-Mwen, a customer of ABC bank issued a $20 Million check drawn on its account, to Bushrod Manufacturing Company (BMC), which is deposited into its account with Satiah Bank.

(a)The reserve ratio

(b)the initial deposit base prior to the $20 million transactions.

(c)Using the money supply expansion process, determine (i) the maximum amount of creation permissible by the marginal deposit and (ii) the reduction in ABC bank's lending capacity as a result of its total deposits after the $20 million transactions.

(d)The reserve requirement that ABC Bank must take to the Central Bank of Liberia as a result of the $20 Million drawn by its customer, Mwen-Mwen company.

Determine the amount deposit (if any) lost by each of the two banks, and the net loss to the global banking system. Explain the rationale for your answer.

Answer rating: 100% (QA)

a The reserve ratio is the ratio of reserves held by a bank to its total deposits In this case the money multiplier MM is given as 5 which means that ... View the full answer