Question 1 Suppose that in a country of Terrvland, the total holdings of banks were as follows:* Required reserves S45 million Excess reserves $15 millionv Deposits- S750 million Loans -$600 million . Government bonds $90 million (a) (b) Show a balance sheet that balances if these are the only assets and liabilities (3 marks) Assuming that people hold no currency and banks have loaned out all of its deposit after keeping the total reserve. Suppose Central bank buys S1 million of government bonds, what will happen to each of these values if the central bank changes the reserve requirement ratio to 2% and banks still want to hold the same percentage of excess reserves? What is the overall money multiplier? How much does the money supply changef? (4 marks) change in the (c) Assuming that people hold no currency and banks have loaned out all of its deposit after keeping the total reserve. Suppose Central bank buys S2 million of government bonds, what appen to each of these values if the central bank changes the reserve requirement ratio to 5%, but banks choose to hold 5% of excess reserves? What is the overall change in the (4 marks)- will h money multiplier? How much does the money supply change? (d) Describe the two factors that limit the precision of the central bank's control of the money (4 marks)! supply in the real world situation and explain how each limits that control. Question 1 Suppose that in a country of Terrvland, the total holdings of banks were as follows:* Required reserves S45 million Excess reserves $15 millionv Deposits- S750 million Loans -$600 million . Government bonds $90 million (a) (b) Show a balance sheet that balances if these are the only assets and liabilities (3 marks) Assuming that people hold no currency and banks have loaned out all of its deposit after keeping the total reserve. Suppose Central bank buys S1 million of government bonds, what will happen to each of these values if the central bank changes the reserve requirement ratio to 2% and banks still want to hold the same percentage of excess reserves? What is the overall money multiplier? How much does the money supply changef? (4 marks) change in the (c) Assuming that people hold no currency and banks have loaned out all of its deposit after keeping the total reserve. Suppose Central bank buys S2 million of government bonds, what appen to each of these values if the central bank changes the reserve requirement ratio to 5%, but banks choose to hold 5% of excess reserves? What is the overall change in the (4 marks)- will h money multiplier? How much does the money supply change? (d) Describe the two factors that limit the precision of the central bank's control of the money (4 marks)! supply in the real world situation and explain how each limits that control
