DSE 13-12

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

The public holds $1 000 million cash and all banks are fully loaned up.

(a) Calculate the monetary base and the money supply in the economy. Show your workings. (4 marks)

(b) If the required reserve ratio is adjusted to 25%, calculate the new money supply in the economy. Show your workings. (2 marks)

(c) With the aid of an aggregate-demand-aggregate-supply diagram, explain the short run effects of an upward adjustment of the required reserve ratio on output and the price level of the economy. (8 marks)