4.

a. What is the Eurodollar creation from a deposit of $2 million when the offshore banks maintain a 5 percent reserve? Assume that the $2 million is deposited in a London office of Barclays Bank,which makes a loan to British Holdings Ltd.,which uses the funds to pay for goods from British Auto Ltd.,which in turn places the proceeds in Citibank in London. Assume that Citibank uses its extra dollars to make a loan to Aviva Corporation, which uses the dollars back in the United States.

b. Recompute the change in Eurodollars in

a, above, assuming instead that a 10 percent reserve/deposit ratio is maintained.

c. Recompute the change in Eurodollars in

a, above, with the 5 percent reserve ratio, assuming that five banks are involved before leakage occurs.

d. What do you think is more important in affecting the size of the Eurodollar multiplier – the size of reserve ratio or the time before a leakage occurs?