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Assignment # 2

29/06/201
Date 5 Time: 1:00-2:40 PM Total Mark:
5

Students Name Ali Safieddine

Students ID U00034998

Course Name Principles of Macroeconomics

Course Code 0308 252 - 11

Semester Summer, 2015/2016

Instructors Name Dr. Hasan Mustafa

Due date 13/07/2016


your answer should be written in computer

Questions 1 2 3 Total
Point 1.5 1.5 2 5
Student Mark

Note: This Assignment accounts for 5 % of the students final grade.


Question 1: Bank reserves and the money supply: (1.5 marks)

1. Calculate the money supply for the following data? (0.5 mark)
Given:

Bank reserves (vault cash) = 1000;

Required reserve ratio = 0.25

Currency in circulation = 2000


Solution:
Money Supply = 2000+(1/0.25)*1000=6000

2. Calculate the currency in circulation for the following data? (0.5 mark)
Given:

Money supply = 5000;


Bank reserves (vault cash) = 1000;

Required reserve ratio = 0.25;


Solution:
CC=5000-(1/0.25)*1000
CC=1000
3. Calculate the required reserve ratio for the following data? (0.5 mark)
Given:

Money supply = 1,250 Solution: RR=1250=250+(1/X) 100

Bank reserves (vault cash) = 100; RR=0.1

Required reserve ratio = X (unknown)

Currency in circulation = 250


Question 2: You are given this account for a bank: (1.5 mark)

Assets Liabilities

Reserves $ 1,000 Deposits $ 7,000

Loans $ 6,000

The required reserve ratio is 10%

A. How much is the bank required to hold as reserves? 7000*10%=700


B. How much are its excess reserves? 1000-700=300
C. By how much can the bank increase its loans? 300
D. Suppose a depositor comes to the bank and withdraws $ 400 in cash. Show

the banks new balance sheet, assuming the bank obtains the cash by

drawing down its reserves. Does the bank now hold excess reserves? Is it

meeting the required reserve ratio? If not, what can it do?


Reserve=1000-400=600. No, required =700. The bank will reduce the loan

amount to increase income.


Question 3: Suppose Mr. Y deposits AED 100,000 into a one-year Certificate of Deposit at 5%

interest. The Central Bank sets the reserve ratio for the banks at 10%. (2 Marks)

a) Illustrate how the banks create money with the help of given information.

(Show first 6 steps) (1.5 Marks)

b) Calculate the total money creation in the economy with the help of formula.

(0.5 Marks)

Assets
Liabilities
RR 100000 100000
L 90000

RR 9000 90000
L 81000

RR 8100 81000
L 72900

RR 7290 72900
L 65610

RR 6561 65610
L 59049

RR 5904.9 59049
L 53144.1
B) 100000*1/10%=1000000

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