Individual Assignment: Subject: Eco121

BUSINESS ADMINISTRATION DEPARTMENT
HOA LAC
INDIVIDUAL ASSIGNMENT
SUMMER2021
SUBJECT: ECO121
Student Information
Name: ĐOÀN ĐỨC HIẾU Roll number: HS150672
Room No: Class: MKT1602
FOR TEACHER ONLY
MARK MARKED BY Signature of Proctor

(Name and Signature)
Question 1 (2.5 marks)
For the following questions, assume there is a 10% required reserve ratio:
a. A bank has $300 of reserves, $300 of loans and $600 of deposits, how much excess reserves
are they holding? How much could the bank make in additional loans right now? How much will
the money supply increase after the money creation process is finished?
b. A bank has total reserves of $450 and excess reserves of $150. What is the banks current
deposit balance? What is the banks current loan balance? What is the maximum amount of
deposits this bank can have?
c. Discuss and explain factors that affect both NX and NCO
Question 2 (2.5 marks)
a. Assume the currency-deposit ratio is 30%, the required reserve-deposit ratio is 8% and the excess
reserve-deposit ratio is 2%. How much would money supply change if the Central Bank made open
market sales valued at $20 million?
b. Assume bank deposits are $3,200 billion, the required reserve-deposit ratio is 10%, and currency
outstanding is $400 billion. What should the Central Bank do to decrease money supply by $100 million?
Question 3 (5 marks)
Suppose the Government wants to increase its expenditure by $200 but does not have much
money so it sells 5 years govenment bonds to the Central Bank on the open market.Then it
deposit $200 in acommercial bank for future use.Assume that all commercial banks chave the
same reserve ratio (Reserve Requirment) of 5% and that they lend out all extra reserves as
loans. Further assume that all borrowers do not keep the loans in the form of currencies but
deposit them in some banks for later use.
a. what is the money multiplier for this economy?

b. How much does the total money supply increase because of this open market operation?
c. Suppose the demand for money does not change, will this open market operation increase or
decrease equlibrium interate rate?
d.Using graphs for themoney market, labor market, and goods market toshow the effect of this
monetary policy in the long run (assume the economy is originally at long run equilibrium)
Answer
Question1:
(a)
The first thing we need to find is how much the bank is required to hold in reserve.
We know that the reserve requirement is 10%.
Since the bank has 600 in deposits their required reserves = 600 x 10% = 60.
They are holding $300 in reserves, but they only need to be holding $60, so the bank has $240 in
excess reserves.
The bank could loan out this additional money making $240 in additional loans, this $240 would
go through the money creation process and become (240 x 10) or $2400 of additional loans, so
the money supply increases by $2,400 after the money creation process is finished.
(b)
Total Reserves = $450
Excess Reserves = $150
Current Deposit Balance = Required Reserves x (1/Required Reserve Ratio) = (450 - 150) x 10 =
$3,000
Bank's Current Loan Balance = Deposits - Total Reserves = 3,000 - 450 = $2,550
Maximum Amount of Deposits that this bank can have = 3,000 x 10 = $30,000
Question2:
(a)
The money multiplier is defined as: M/H = mm = (1 + cu)/ (cu + re)
In this example the size of the money multiplier is equal to:
mm = (1+0,3)/ (0,3+0,08+0,02) =3,25
An open market sale valued at $20 million would decrease high-power money (H) by $20
million. Therefore, money supply (M) would decrease by $65 million, since
M*=mm=3,25 x (-20) = -65
(b)
Ms = Cu + D =400 + 3,200=3,600
H = Cu + R = Cu + 0,1D = 400 + 320 = 720
=> Money multiplier = Ms/H = mm = 3,600/720 = 5
Ms*=mm(H*) => -100= 5 H* => H*=-20
If the Fed wants to decrease money supply by $1000 million, bank reserves have to be decreased
by $20 million through the open market sale of government securities.
Question3:
(a) Money multiplier = 1/ reserve ratio = 1/0.05=20
(b) RR = 5% * 200$ = 10$
MS = Deposits + Loans= 200 + 190 = 390
(c) Equilibrium interest rate means money supply = money demanded.
Open market operation increased money supply and lowered interest rates. Low interest rates
have helped stimulate business investment and housing demand.
(d)

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BUSINESS ADMINISTRATION DEPARTMENT

FOR TEACHER ONLY

MARK MARKED BY Signature of Proctor

Question 1 (2.5 marks)

c. Discuss and explain factors that affect both NX and NCO

Question 2 (2.5 marks)

a. what is the money multiplier for this economy?

We know that the reserve requirement is 10%.

Excess Reserves = $150

In this example the size of the money multiplier is equal to:

mm = (1+0,3)/ (0,3+0,08+0,02) =3,25

M*=mm=3,25 x (-20) = -65

H = Cu + R = Cu + 0,1D = 400 + 320 = 720

=> Money multiplier = Ms/H = mm = 3,600/720 = 5

Ms*=mm(H*) => -100= 5 H* => H*=-20

(a) Money multiplier = 1/ reserve ratio = 1/0.05=20

(b) RR = 5% * 200$ = 10$

MS = Deposits + Loans= 200 + 190 = 390

(c) Equilibrium interest rate means money supply = money demanded.

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Ms=mm(H) => -100= 5 H* => H*=-20