DSE 12-13

The following table shows the balance sheet of the banking system of an economy.

Suppose the public does not hold cash and there are $100 million excess reserves in the banking system.

(a) Find the required reserve ratio. Show your working. (2 marks)

(b) Find the maximum possible amount of deposits if the banks are fully loaned up. Show your working. (2 marks)

(c) The central bank injects $200 million newly-printed banknotes into the banking system. If the banks lend out all of their excess reserves, what will the amount of money supply be in the economy? Show your working. (4 marks)

(d) Based on the quantity theory of money, predict the effect of the monetary policy in (c) on the price level. State the assumption(s) needed to reach your conclusion. (4 marks)