1 of 18 (1 complete) This Quiz: 18pts pod Challenge Problem Assume that the publ

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1 of 18 (1 complete) This Quiz: 18pts pod Challenge Problem Assume that the public in the small country of Sylvania does not hold any cash. "money multiplier is given by 1/(RR + ER). where Albanks however, hold 9 percent of their checking deposits as excess reserves, 10 ardless of the interest rate in the questions that blow the RR = the percentage of deposits that banks are required to keep as reserves ER = the percentage of deposits that banks voluntarily hold as excess reserves Consider the balance sheet of one of several identical banks Total Assets Liabilities and Net Wor Reserves Do Checking Deposits Loans Net Worth 500 Liabilities and Net Worth The required reserve ratio in this economy is %. (Enter your response as an integer) If the total money stock (supply) is $200,000, the total amount of reserves held in the banking system is S(Entor your response as an integer) The Sylvania Central Bank decides that it wants to cut the money stock in halt. It is considering an open market operation With commercial banks holding 9 percent of their checking deposits as excess reserves and the required reserve ratio equal to the value computed above, the Central Bank should bonds worth $ (Entor your response as an integer) Enter your answer in each of the answer boxes 4 o e ALIEN WAR E

Explanation / Answer

Excess reserves = 9% of checking deposits

Excess reserves = 0.09 (1,500) = $135.

Now, Reserves = Required reserves(RR) + Excess reserves (ER)

Reserves= $300 (given) , Excess reserves= $135

Therefore, 300 = RR + 135

RR= 300 -135 = $165

Now, required reserve ratio =( Required reserves / Deposits) 100

=( 165/ 1500 )100

= 11%

Therefore required reserve ratio is 11% in the economy.

If the total money supply is $ 2,00,000 . Then , what will be the total amount of reserves . To find this the calculation is below:

Money supply = Total deposits + cash held by public

$ 2,00,000 = Total deposits + 1,200 [because loans = 1200 (given in the table)]

Total deposits = $ 1,98,800

And Total deposits = 1/ RR + ER (reserves) [because 1/ER + RR is the multiplier]

$1,98,800 = 1/ 0.11 + 0.09 (reserves)

$1,98,800 = 1/0.20 (reserves)

Total reserves = $ 39,760.

The Sylvania central bank decides that it wants to cut the money stock in half . It is considering open market operation. With commercial banks holding 9 % of their checking deposits as excess reserves and the required reserve ratio equal to 11% .Then , to find how many dollars worth of bonds central bank should buy/sell , calculation is below:

Money multiplier = 1/0.20 --- that we derived earlier.

Now , new money supply = $1,00,000 (because central bank cut it to half , earlier it was 2,00,000)

Money supply = total deposits + cash held by public

$ 1,00,000 = Total deposits + $1200

Now, total deposits = $ 98,800

Because ,Total deposits = 1/0.20 (Total reserves )

$ 98,800 = 1/0.20 (reserves)

$ 98,800 (0.20) = reserves

Reserves = $19,760. ---- (This is the bond value)

Change in bond value = $ ( 39,760 - 19,760)

= $ 20,000

So , this implies that Sylvania central bank must sell $20,000 worth of bonds to cut the money supply in half.

  

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