Question 2

i. The T-account of Bank Al-Habib is given below, with units in millions of rupees.

a.How would a deposit of Rs. 60 million change reserves?

b.What would the cap on loans now be at Bank Al-Habib?

c.How many loans would the banking system create with this deposit?

Assets Liabilities

Reserves 20 Deposits 200

Bonds 180

ii. Bank Al-Falah has assets worth Rs. 200 million, including Rs. 50 million as per SBP reserve requirements, and Rs. 150 million in National Saving Bonds. Its T-account is balanced.

a. I visit the bank and pay off Rs. 1 million of my house loan by making a cash payment to Bank Al-Falah. What happens to Bank Al-Falah reserves?

b. I repaid my loan to help increase the money supply during COVID-19, I tell my friend. Evaluate this statement and explain your answer. You can write down any assumptions you need to make in order to support your answer.