Table 7 shows the balance sheet of a typical banking system of Country H. Assets ($ billion) Liabilities ($ billion) 2,500 Reserves Loans 500 Demand Deposits 2,000 2,500 Total Table 7 Total 2,500 Suppose the public holds $1,000 billion of currency in hand and the banking system is fully loaned up. (a) Calculate the required reserve ratio of the banking system and the current money supply as M1 in Country H. Show your workings. (4 marks) (b) Suppose the banking system has decided to hold an actual reserve of 40 percent. In view of this, draw a new balance sheet of the banking system. What is the new money supply as Mi of Country H? Show your workings. (6 marks) (c) Based on your answers of part (a) and (b), calculate and describe the change of money supply and show your workings. Explain how could the change in actual reserve influence the money supply as you calculated. How will the change of money supply impact the Gross Domestic Product and unemployment rate of Country H? Explain. (6 marks) (d) The Central Bank of Country H is going to issue a 5-year bond for the subscription by the general public. Name and explain this policy. Suppose Country H is experiencing an economic downturn, would you recommend the Central Bank to issue this 5-year bond? Explain. (4 marks) Table 7 shows the balance sheet of a typical banking system of Country H. Assets ($ billion) Liabilities ($ billion) 2,500 Reserves Loans 500 Demand Deposits 2,000 2,500 Total Table 7 Total 2,500 Suppose the public holds $1,000 billion of currency in hand and the banking system is fully loaned up. (a) Calculate the required reserve ratio of the banking system and the current money supply as M1 in Country H. Show your workings. (4 marks) (b) Suppose the banking system has decided to hold an actual reserve of 40 percent. In view of this, draw a new balance sheet of the banking system. What is the new money supply as Mi of Country H? Show your workings. (6 marks) (c) Based on your answers of part (a) and (b), calculate and describe the change of money supply and show your workings. Explain how could the change in actual reserve influence the money supply as you calculated. How will the change of money supply impact the Gross Domestic Product and unemployment rate of Country H? Explain. (6 marks) (d) The Central Bank of Country H is going to issue a 5-year bond for the subscription by the general public. Name and explain this policy. Suppose Country H is experiencing an economic downturn, would you recommend the Central Bank to issue this 5-year bond? Explain. (4 marks)
