Question 1

i.Metropolitan Bank has total assets of Rs. 100 million, including bonds of Rs. 80 million. Its demand deposits are Rs. 100 million, and the reserve ratio is 20%. It's T-account is balanced.

The SBP buys the Rs. 80 million Metropolitan Bank is holding in the form of bonds. By what amount, if any, do reserves of this bank change? You must talk about both required and excess reserves [4]

b. Would this open market purchase of the SBP lead to any change in the money supply in this case? If so, explain how, and by how much, at maximum in the entire banking system? [6]

ii.a. I take a house loan from Standard Chartered Bank, pocket the money, go buy a house, and pay my real estate agent the whole loan amount on completion of the transaction. The dealer deposits the money in a Swiss bank account. By how much has the money supply changed?Explain [3]

b. Why is the SBP worried about people like this real estate agent? Think about how it affects the ability of the SBP to perform one of its main functions [2]