Question 4:

(8 marks)

(a)Suppose that banks hold five percent of deposits as cash reserves and that the public holds no cash (all money is held as bank deposits). Show the effect of a $150 deposit. Be sure to show the mechanics of the system, and the final balances for (i) deposits, (ii) cash reserves, and (iii) loans.

(3 marks)

(b)What do you understand by the term "Official cash rate (OCR) in New Zealand, and how does it work as a tool of monetary policy? Briefly explain your answer without use of a diagram, citing appropriate references, including webpage of Reserve Bank of New Zealand (RBNZ).

(5 marks)