Question

61 Suppose the required reserve ratio is 40% and all banks do not hold excess reserves. I Michael deposits S2000 cash in his current account (1) the money supply MI will immediately decrease by $2.000 (2) the maximum increase in bank deposits will be SS 000 (3) the maximum increase in bank loans will be 52 000 A. (1) only B. (2) only c. (1) and (2) only D. (1), (2) and (3) 11 the ability of deposit creation of a banking system will A. the public keep more cash for daily transactions... Increase B. the government is the required reserve to... Increase C. banks hold more excess reserves... decrease D. the demand for loans increases ... decrease 28 Which of the following will weaken the ability of deposit creation of a banking system (1) Cash leakage (2) Increase in bank loans (3) Increase in actual reserve ratio A. (2) enly B. (1) and (2) only c. (l) and () only D. (1).(2) and (3) 38 In 2004, many Hong Kong people donated money to help the sami victims in South Asia a charitable organisation. They withdrew 550 million from the banks in Hong Kong the money to South Asia. Which of the following pieces of information de we seed decrease in deposits caused by this withdrawal? (1) Required reserve ratio (1) Actual reserve to 0) Cash leakage ratio A (1) only B. (2) only c. () only D. (1.2) and (3)

Answer 1

61. C. 1 and 2 only

When person deposit 2000 in bank then money supply immediately decreases by 2000.

Total increase in deposits = 1/Required reserve x deposits = 1/0.4 x 2000 = 2.5 x 2000 = 5000

Bank loans = Deposits - Required reserves = 2000 - 2000 x 0.4 = 2000 - 800 = 1200

9. C. banks hold more excess reserves..... decrease

When banks hold more excess reserves then they have less money to lend which reduces bank's ability to create deposits. Required reserve ratio is increased by the Fed not by the government.

28. C. 1 and 3 only

Cash leakages decreases deposit creation because banks have less money to lend. Increase in reserve ratio require banks to keep more money in reserves which reduces amount left to provide loan so ability to create deposit decreases.

38. D. 1, 2 and 3

Withdrawal of money reduces amount of required reserve, actual reserve and increases cash leakage.