Finance & Accounting
Pages 3 (753 words)
1. (20 points) Assume that the country of Alphania has one bank. Its monetary base is $24,000,000, the reserve requirement is 10%, and the currency requirement is 40%. The bank lends out all of its excess reserves in parts (a) and (b). SHOW ALL WORK WHEN ANSWERING THE FOLLOW QUESTIONS: a.
This is due to the reason that it will allow the bank to fulfill the money requirements of the owners of demand deposits when asked. Demand deposits (40% of $ 24,000,000) $ 9,600,000 Money supply as defined by Fed does not include bank reserves. It only includes such money that may be used for exchanging goods and services. On the other hand, demand deposits and all other cash which can be used for transactions are included in money supply. Demand deposits $ 9,600,000 Loans $ 12,000,000 Money supply $ 21,600,000 The money supply in the form of loans is in the form of cash. so, money supply in cash is equal to the mount of loans. Money supply in cash $ 12,000,000 b. What happens to the money supply, if the monetary base is $24,000,000, the reserve requirement is 10%, and the currency requirement decreases to 20%? Calculate the new loans, demand deposits, money supply, and cash. Ans: monetary base $ 24,000,000 Reserve requirement 10% Currency requirement 20% Loans (100%-10%-20%) 70% Loans the bank can make (70% of $24,000,000) $ 16,800,000 Demand deposits (20% of $ 24,000,000) $ 4,800,000 Demand deposits $ 4,800,000 Loans $ 16,800,000 Money supply $ 21,600,000 Money supply in cash = loans given by bank $ 12,000,000 c. ...