Q.9. The government of Eastlandia uses measures of monetary aggregates similar t
ID: 1115458 • Letter: Q
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Q.9. The government of Eastlandia uses measures of monetary aggregates similar to those used by the United States, and the central bank of Eastlandia imposes a required reserve ratio of 10%. Given the following information, answer the questions below. Bank deposits at the central bank- $200 million Currency held by public $150 million Currency in bank vaults $100 million Checkable bank deposits $500 million Traveler's checks $10 million a. What is M1? b. What is the monetary base? c. Are the commercial banks holding excess reserves? 10 d. Can the commercial banks increase checkable bank deposits? If yes, by how much can checkable bank deposits increase?Explanation / Answer
a. M1 = Coins and currency in circulation + checkable (demand) deposit + traveler's checks
Currency held by the public = $150 m
Checkable bank deposits = $500 m
Travellers cheques = $10 m
M1= $150 + $500m + $10m=$660m.
b. Monetary base includes money which is highly liquid. It is the sum of currency held by the public and commercial bank deposits with the Central Bank.
c. Required Reserves = m x Demand Deposits in which m is the required reserve ratio.
Required Reserves = 10% of $500 million = .10 x $ 500 million = $50 million.
The bank has reserves of $200 million.
Excess Reserves = Reserves - Required Reserves.
Excess Reserves = $200 million - $50 million = $150m
The bank is holding excess reserves of $150m.
d. Yes, Checkable deposits can be increased by $150m.
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