Question:1

i. The tables below show the Taccounts for the SBP and the entire private banking sector of Pakistan. Assume no one holds currency, and all purchases are made via debit cards or checks. Private banks do not hold excess reserves. State Bank of Pakistan AS SETS LIABILITIE S Bonds Rs.15 million Reserves Rs.15 million Private Banking System AS SETS LIABILITIE S Reserves Rs. 15 mill Demand Deposits Rs.l} Bonds Rs. 32.5 mill million Loans Rs.12.5 mill a. The State Bank makes an open market purchase of Rs.5 million worth of government bonds from the banking system. Show how this impacts the t-accounts before the banking system adjusts to the required reserve level. The State Bank Taccount has been done for you.[3] State Bank ASSETS LIABILITIES Bonds 15 mill Reserves 15 mill +Rs. 5 million +Rs.5 mill =Rs. 20 million =Rs. 20 mill Private banking sector AS SETS LIABILITIE S Reserves Rs.15 mill Demand Deposits Rs. 60 mill Bonds Rs.32.5 mill Loans Rs.12.5 b. After the Open Market Operations in part (a), does the banking system have excess reserves or insufcth reserves? c. How much do total deposits increase by in the private banking sector? How much do loans increase by? d. What is the new supply of money aer the DMD and what would happen to the equilibrium market interest rate, ceteris paribus? ii. a. Consider the loanable funds market. The government runs a budget decit and people simultaneously start to save more in light of COVE-19. What happens to the equilita'ilun interest rate and quantity? Show your answer with a diagram. List any assumptions you make