Question:
The table shows a bank's balance sheet. The desired reserve ratio on all deposits is 5 per cent.
|
Assets
|
Liabilities
|
|
(millions of dollars)
|
|
Reserves at RBA
|
25
|
Current deposits
|
90
|
|
Cash in vault
|
15
|
Saving deposits
|
110
|
|
Securities
|
60
|
|
|
Loans
|
100
|
|
(a) What, if any, are the bank's excess reserves? How much will the bank loan? If there is no currency drain, what are the bank's excess reserves, if any, after it has made the first loan?
(b) If there is no currency drain, what is the quantity of loans and total deposits when the bank has no excess reserves?
(c) Suppose that the currency drain ratio is 10 per cent of deposits and the desired reserve ratio is 1 per cent. If the Reserve Bank sells $100,000 of securities on the open market, calculate excess reserves after the first round. Calculate the money multiplier.
Using graphs, explain the change in the nominal interest rate in the short run if
(d) Real GDP increases.
(e) The money supply increases.
(f) The price level rises.