QUESTION ONE (10 MARKS)

1. It is a must for a Bank Adam Berhad to comply to Bank Negara Malaysia reserve requirement of 10%. The following is Bank Adam Berhad initial balance sheet:

Bank Adam

Assets (million)	Liabilities (million)
Reserves 200 Loans 1000 Securities 900	Checkable Deposits 2000 Bank Capital 100

One of the Bank Adam Berhad depositors decided to withdraw RM1000 from his checkable deposit account. Due to inability for the bank to maintain sufficient excess reserves the bank unable to fulfill the withdrawal.

(i) What is the amount of required reserve if the there is a withdrawal of RM1000. What is the problem faced by the bank?

(ii) As a bank manager, you have allocated several ways to overcome the problem occur in (i). After long discussion with the board members, the bank decided to sell their securities to meet the reserve requirement. Show what happens to the balance sheet of Bank Adam Berhad after the withdrawal and after the selling of securities?

QUESTION TWO (10 MARKS)

Given the following information

Reserve requirement for demand deposits = 12%

Cash in circulation = RM 210 millions

Demand Deposits = RM 574 millions

Money Market Deposits = RM287 millions

Reserves loaned from Central Bank = RM 15 millions

Non-loan reserves in Central Bank = RM94 millions

Excess Reserves = RM 0.96 millions

Assume that the money market deposit is not subject to reserve requirements.

1. Calculate the value of money multiplier for M1 and M2
2. If you wish that the Central Bank will expand its monetary base (M1) so money supply (M1) would grow by 3% over the next one year, how much should the monetary base change in order to realise the changes?

QUESTION THREE (10 MARKS)

Consider the following balance sheet of Berjaya Bank. The required reserve ratio on demand deposits is 8%.

Berjaya Bank

Aset / Assets (million $)	Liabiliti / Liabilities (million $)
Rizab / Reserves 30 Pinjaman / Loans 150 Sekuriti / Securities 140	Deposit semasa 290 Demand deposits Modal bank / Net Worth 30

1. Calculate the banks excess reserves
2. Suppose Berjaya Bank sells $40 million of its securities to the central bank. Show the balance sheet of Berjaya Bank after this transaction

SOALAN EMPAT (10 MARKS)

Base on the following information:

Demand deposits = $950 million

Currency in circulation = $570 million

Excess reserves = $40 million

Required reserve ratio on demand deposit = 12%.

1. Calculate the money supply, the excess reserve ratio, the currency ratio, and monetary base.
2. Due to a sharp contraction of the economy, the central bank conducts an open market purchase of bonds held by the financial institutions of $750 million. The financial institutions choose to hold $250 million of the proceeds as excess reserves. What happens to the amount of excess reserves, the excess reserve ratio, the money multiplier, and the money supply?