Question

Question 3

2) There is only one chartered bank in the country of Kwasu, and it has the following assets and liabilities:

Currency reserves$20 million

Reserves held at the Bank of Kwasu$10 million

Loans$700 million

Securities$20 million

Deposits $750 million

Answer the following questions.

1. Assuming that the bank has freely chosen its reserves, what is the desired reserved ratio?
2. If the amount of currency in circulation is $50 million, what is the monetary base?
3. What is the money supply?

Answer 1

(a)

Currency reserves = $20 million

Reserves held at the Bank of Kwasu = $10 million

Total reserves = Currency reserves + Reserves held at the Bank of Kwasu

Total reserves = $20 million + $10 million = $30 million

The total reserves with bank is $30 million.

Deposits = $750 million

Calculate the desired reserve ratio -

Desired reserve ratio = total reserves/deposits = $30 million/$750 million = 0.04 or 4%

Thus,

The desired reserve ratio is 4%.

(b)

Currency in circulation = $50 million

Total reserves = $30 million

Calculate the monetary base -

Monetary base = Currency in circulation + Total reserves

Monetary base = $50 million + $30 million = $80 million

Thus,

The monetary base is $80 million.

(c)

Currency in circulation = $50 million

Deposits = $750 million

Calculate the mney supply -

Money supply = Currency in circulation + Deposits

Money supply = $50 million + $750 million

Money supply = $800 million

Thus,

The moeny supply is $800 million.