Question 3 (25 marks total) In the economy of Northern Ireland, bank deposits are 450 billions, bank reserves are 45 billions, of which two thirds are required by the central bank; bank loans are 300 billions; and those commercial banks also hold 105 billion government bond. a) Show the combined balance sheet of all the commercial banks if they only have assets and liabilities as mentioned above. (6 marks) b) Assuming that people hold no currency. What happens next is that the central bank changes the reserve requirement ratio to 8%. Following this change, the banks will no longer hold any excess reserves, but will hold the same amount of Treasury bonds. Show the new combined balance sheet of the banks. And, by how much will the money supply change? Show calculations. (7 marks) c) Assume the central bank buys a 50 billion government bond from a commercial bank, keeps the required reserve ratio unchanged (at 8%), find the new money supply and explain how more money supply is created. (6 marks) d) Assume the central bank buys a 50 billion government bond from the general publics, with other things unchanged, find the new money supply and explain how more money supply is created as a result. (6 marks) Question 3 (25 marks total) In the economy of Northern Ireland, bank deposits are 450 billions, bank reserves are 45 billions, of which two thirds are required by the central bank; bank loans are 300 billions; and those commercial banks also hold 105 billion government bond. a) Show the combined balance sheet of all the commercial banks if they only have assets and liabilities as mentioned above. (6 marks) b) Assuming that people hold no currency. What happens next is that the central bank changes the reserve requirement ratio to 8%. Following this change, the banks will no longer hold any excess reserves, but will hold the same amount of Treasury bonds. Show the new combined balance sheet of the banks. And, by how much will the money supply change? Show calculations. (7 marks) c) Assume the central bank buys a 50 billion government bond from a commercial bank, keeps the required reserve ratio unchanged (at 8%), find the new money supply and explain how more money supply is created. (6 marks) d) Assume the central bank buys a 50 billion government bond from the general publics, with other things unchanged, find the new money supply and explain how more money supply is created as a result. (6 marks)
