Suppose the ECCB purchases a Dominican gov't bond from you for $10,000

a. What is the name of the ECCB action (1mks)

b. Suppose you deposit the $10000 in First Student Bank (FSB). Show this transaction on FSB T-

account (2mks)

c. Suppose the reserve requirement is 20%. Show FSB T-account if they loan out as much as they

can (3mks)

d. At this point, how much money has been created from the central bank policy action? (2mks)

e. What is the value of the money multiplier? (2mks)

f. After infinite rounds of depositing and lending, how much money could be created from the

Central Bank's policy action (3mks)

g. If during the rounds of depositing and lending, some people keep extra currency and Fail to

deposit all of their receipts, will there be more or less money created from the central bank

policy action than you found in f above? Why? (4mks)

2. Imagine that the banking system received additional deposits of $100 million and that all the

individual banks wish to retain their current liquidity ratio of 20%.

a. How much of the$100 Million will banks choose to lend out initially? (2mks)

b. What will happen to banks liabilities when the money that is lent out is spent and the

recipients of it deposit it in their bank accounts? (2mks)

c. How much of these latest deposits will be lent out by the banks? (2mks)

d. By how much will total deposits eventually have risen, assuming that none of the additional

liquidity is held outside the banking sector? (2mks)

e. How much of these extra total deposits are matched by (i) liquid assets; (ii) illiquid

assets?(2mks)

f. What is the size of the bank multiplier? (3ms)

g. If one-half of any additional liquidity is held outside the banking sector, by how much less

will deposits have risen compared with (d) above? (5mks)

3. As a policy adviser, explain how you would use the OMO to secure 3 -5% economic growth and

reduce unemployment in an economy in slight recession? (5mks)

b. Describe possible unintended consequence to your policy actions.