(a) If banks operate a 20 per cent liquidity ratio, by how much will credit expa

Question

(a)        If banks operate a 20 per cent liquidity ratio, by how much will credit expand if new deposits of £100 million are made by the customers of banks.

(b)        Show the combined balance sheet (of additional liabilities and assets) for all banks (i) at the beginning, and (ii) at the end of this process.

(i) Initial effect

(ii) Eventual effect

Liabilities £m Assets £m Initial new deposits ….. Initial additional liquid assets ….. Initial additional credit …. Total Initial new liabilities …. Total initial new assets

Explanation / Answer

Credit limit will expand by 80 million. (20% of $100 million will be kept as liquidity of the bank.)

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