QUESTION TWO a) The total demand deposits in the Banking system in Zambia curren

Question

QUESTION TWO a) The total demand deposits in the Banking system in Zambia currently stand at K20 billion. The central bank has purchased Government securities resulting in an increase in the monetary base by K270 million. Assuming there is no leakage into currency in circulation and excess reserves, what will be the total deposits when the statutory reserve ratio is 18%? (5marks) b) From (a) above, assuming currency in circulation stands at K6 billion, what is broad money (M1) before and after the purchase of Government securities? (5 marks) Compute the money multiplier after the purchase of Government securities when currency in circulation is at K6 billion, the required reserves ratio is 18%, and the excess reserves to deposits ratio is 0.05% c) (5 marks) d) How does an improvement in interbank activity affect the money multiplier (5 marks) Total 20 marks) QUESTION THREE

Explanation / Answer

A) Given that demand deposits D = 20 B. SR ratio = 18% and so SR amounts to 18% of 20 B = 3.6 B. Now with no excess reserves, multiplier is 1/SRR = 1/0.18 = 5.55. With increase in monetary base by 0.270 B, total deposits increase by 0.270 x 5.55 = 1.5 B and so total deposits are 21.5 B

B) Currency is 6 B. M1 is the sum of C and D. Hence M1 initially is 6 + 20 = 26 B. After the change, M1 = 6 + 21.5 = 27.5 B

C) Money multiplier = 1 + C-D / C-D + E-D + R-D

= 1 + (6/20) / (6/20) + (18/100) + (0.05/100) = 2.706

D) It increases the value of multiplier as currency moves withing the bank and lending activities are increased.

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