MaY Eng. Asmaa Fawzi

Transcription

1 Eng. Asmaa Fawzi +965-

2 Money supply: Is the quantity of money available in the economy, and includes currency (available in the hands of people) and demand deposits (deposited by people in banks) Money supply = Currency + Demand deposits Or Money supply = Money multiplier Bank Deposit شرف ( system Central bank: is an institution that oversees the banking the money supply. Ex: Central Bank (جنظن) and regulates (على النظام الوصرف.(بنك الكو ث الوركزي) of Kuwait Monetary policy: is the setting of money supply by policy makers in the central bank. The banking system contains: Reserves: the amount of deposits kept by the bank, while the rest of deposit is used to make loans. The minimum % of required reserve is set by the central bank and is called Reserve ratio. Reserve ratio (R) is a fraction of deposits that the bank holds as reserves. R = Loans: the part of deposits the bank offers for investors as loans to get interest. This is how banks make money. Bank T-account: is a simplified accounting statement that shows the bank assets (األصول/الووحلكات) and liabilities الوطلوبة),(االلحزاهات where assets equal liabilities. = Reserves + Loans = Deposits

3 Bank s T - account Reserves R $D Deposits $D Loans (1-R) $D Money multiplier: is the amount of money generated by the banking system with each dollar of deposits. Money multiplier = 1/R The central bank can increase the money supply by increasing the money multiplier or decreasing the reserve ratio. Therefore, the increase made to the money supply can be calculated using these equations: Increase in money supply (Deposits) = 1/R Loans Increase in money supply (Bonds) = 1/R Bonds

4 Q2. Your uncle repays a $100 loan from Tenth National Bank (TNB) by writing a $100 check from his TNB checking account. Use T-accounts to show the effect of this transaction on your uncle and on TNB. Has your uncle s wealth changed? Explain. As the $100 moves from checking account in the bank to the bank s assets, there is no change in the money supply, but assets and liabilities change. For uncle: $100 moves from his assets to pay his liabilities, therefore assets and liabilities become 0 and his wealth is unchanged. For TNB: $100 moves from being uncle s deposit in the bank to repay his loan, therefore the bank s assets and liabilities become 0. T - account Uncle TN Bank Asset Deposit $100 0 Asset Loan $100 0 Loan $100 0 Deposit $100 0

5 Q3. Al-Khatib Bank (AKB) holds $250 million in deposits and maintains a reserve ratio of 10%. a) Show a T-account for AKB. Reserves $25000 Deposits $ Loans $ b) Now suppose that AKB s largest depositor withdraws $10 million in cash from her account. If AKB decides to restore its reserve ratio by reducing the amount of loans outstanding, show its new T-account. Reserves $24000 Deposits $ Loans $ c) Explain what effect AKB s action will have on other banks. As money moves from bank to another, they create more loans. That s why when one bank reduces the loans it offers, this will reduce the amount of money other banks get and therefore will reduce loans as well. d) Why might it be difficult for AKB to take the action described in part (b)? Discuss another way for AKB to return to its original reserve ratio. When the reserve ratio stays the same and deposits decrease, this means the amount of money left for the bank to offer as loans will also decrease. This means that the bank will get less interest than expected. For AK Bank to maintain the same deposit, it can borrow from the Central Bank.

6 Q4. You take $100 you had kept under your mattress and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks holds reserves equal to 10% of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase? Reserves $10 Deposits $100 Loans $90 Increase in deposit = money multiplier = 1/R Deposit = 1/0.1 $100 = $1000 Increase in money supply (Deposit) = 1/R Loans = 1/0.1 $90 = $900

7 Q7. Assume that the reserve requirement is 5%. All other things equal, will the money supply expand more if the central bank buys $2000 worth of bonds or if someone deposits in a bank $2000 that he had been hiding in his bedroom? If one creates more, how much more does it create? Support your thinking. Increase in money supply (Deposit) = 1/R Loans = 1/0.05 $1900 = $38000 Increase in money supply (Bonds) = 1/R Bonds = 1/0.05 $2000 = $40000 Therefore, money supply will expand more from buying bonds, as part of the deposits should be reserved while bonds can be used totally for loans. The difference = $ $38000 = $2000

8 Q8. Suppose that the T-account for First National Bank is as follows: Reserves $ Deposits $ Loans $ a) Is a central bank requires banks to hold 5% of deposits as reserves, how much in excess reserves does First National now hold? Required reserve = 5% $ = $25000 Excess reserve = $ $25000 = $75000 b) Assume that all other banks hold only the required amount of reserves. If First National decides to reduce its reserves to only the required amount, by how much would the economy s money supply increase? Increase in money supply (Deposit) = 1/R Loans = 1/0.05 $75000 = $1,500,000