Question
Assuming an economy have only two commercial banks in it banking system, Classic Bank and Prudent Bank. The following shows the balance sheet of the
Assuming an economy have only two commercial banks in it banking system, Classic Bank and Prudent Bank. The following shows the balance sheet of the two banks as at 2019.
Classic Bank
Balance sheet as at December, 2019
| GHSm |
| GHSm |
|
| Liabilities & Equity : |
|
Reserves | 1,000 | Deposits | 3,000 |
Securities | 2,000 | Equity | 7,000 |
Loans & Advances | 1,000 |
|
|
Property, Plant and Equipment | 6,000 |
|
|
| 10,000 |
| 10,000 |
Prudent Bank
Balance sheet as at December, 2019
| GHSm |
| GHSm |
Assets: |
| Liabilities & Equity: |
|
Reserves | 600 | Deposits | 2,500 |
Securities | 1,500 | Equity | 7,000 |
Loans & Advances | 800 |
|
|
Property, Plant and Equipment | 4,000 |
|
|
| 6,900 |
| 6,900 |
Assume a required reserve ratio of 10%.
- What is the amount of excess reserves in this commercial banking system?
- What is the maximum amount that the money supply can be expanded? What would be the effect of a fall in reserve ratio to 5%, on the maximum amount that the money supply can be expanded?
- Determine the stock of broad money supply assuming the non-bank public holds notes and coins of GHS4,000million.
- ) Suppose Classic bank makes additional loans of GHS300 million to its customers and some of these customers use GHS150 million to make payment to other depositors of the same bank and GHS150 million to make payments to clients of Prudent bank.
- (i) Draw up the new balance sheets of each bank.
Classic Bank
Balance sheet as at December, 2019
| GHSm |
| GHSm |
Assets: |
| Liabilities & Equity: |
|
Reserves |
| Deposits |
|
Securities |
| Equity |
|
Loans & Advances |
|
|
|
Property, Plant and Equipment |
|
|
|
|
|
|
|
Prudent Bank
Balance sheet as at December, 2019
| GHSm |
| GHSm |
Assets: |
| Liabilities & Equity: |
|
Reserves |
| Deposits |
|
Securities |
| Equity |
|
Loans & Advances |
|
|
|
Property, Plant and Equipment |
|
|
|
|
|
|
|
(ii) Determine the stock of broad money holding the assumption made in part (c).
(iii) What is the multiplier effect of money supply.
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