Question 1: Bank reserves and the money supply: 1- Calculate the money supply fo

ID: 1199496 • Letter: Q

Question

Question 1: Bank reserves and the money supply:

1- Calculate the money supply for the following data?

Bank reserves (vault cash) = 1000;
Required reserve ratio = 0.25
Currency in circulation = 2000

2- Calculate the currency in circulation for the following data?

Money supply = 5000;

Bank reserves (vault cash) = 1000;
Required reserve ratio = 0.25;

3- Calculate the required reserve ratio for the following data?

Money supply = 1,250
Bank reserves (vault cash) = 100;
Required reserve ratio = X (unknown)
Currency in circulation = 250

Question 2: 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%.

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

(Show first 5 steps)

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

1. Given: Bank reserves (vault cash) = 1000;
Required reserve ratio = 0.25
Currency in circulation = 2000

Money = Currency in circulation + ( 1 / RR) Reserves

=>2000+(1/.25)1000 => 6000

2. Given: Money supply = 5000; Bank reserves (vault cash) = 1000; Required reserve ratio = 0.25;

Currency in circulation = bank reserves = X (unknown)

Money = Currency in circulation + ( 1 / RR) Reserves

5000= X+(1/.25)1000 => X= 1000

3. Giiven: Money supply = 1,250; Bank reserves (vault cash) = 100; Required reserve ratio = X (unknown); Currency in circulation = 250

Money = Currency in circulation + ( 1 / RR) Reserves

1250= 250+(1/X)100

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