Question 9A. ECB Bank is a commercial bank in Country A. The T-account of ECB Bank is shown below:AssetsLiabilities(millions)(millions)Reserves$100,000Deposits$200,000Loans$100,000i.If the commercial banks in Country A are required to maintain a reserve ratio of 8%,how much excess reserves are now held by ECB Bank?i.If ECB Bank decides not to hold excess reserves, by how much will the economy'smoney supply increase or decrease? Explain.B:Assume the Central Bank of Country A requires a reserve ratio of 8% and banks inCountry A do not hold excess reserves currently.i.If the Central Bank now has a target to increase the economy's money supply by $4,000million, what amount of bonds will the government need to buy or sell?ii.Assume the Central Bank conducts the open-market operations, state one situation thatmight cause the increase in the economy's money supply to be lower than the CentralBank's target?

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Asked Dec 17, 2019
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Question 9
A. ECB Bank is a commercial bank in Country A. The T-account of ECB Bank is shown below:
Assets
Liabilities
(millions)
(millions)
Reserves
$100,000
Deposits
$200,000
Loans
$100,000
i.
If the commercial banks in Country A are required to maintain a reserve ratio of 8%,
how much excess reserves are now held by ECB Bank?
i.
If ECB Bank decides not to hold excess reserves, by how much will the economy's
money supply increase or decrease? Explain.
B:
Assume the Central Bank of Country A requires a reserve ratio of 8% and banks in
Country A do not hold excess reserves currently.
i.
If the Central Bank now has a target to increase the economy's money supply by $4,000
million, what amount of bonds will the government need to buy or sell?
ii.
Assume the Central Bank conducts the open-market operations, state one situation that
might cause the increase in the economy's money supply to be lower than the Central
Bank's target?
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Question 9 A. ECB Bank is a commercial bank in Country A. The T-account of ECB Bank is shown below: Assets Liabilities (millions) (millions) Reserves $100,000 Deposits $200,000 Loans $100,000 i. If the commercial banks in Country A are required to maintain a reserve ratio of 8%, how much excess reserves are now held by ECB Bank? i. If ECB Bank decides not to hold excess reserves, by how much will the economy's money supply increase or decrease? Explain. B: Assume the Central Bank of Country A requires a reserve ratio of 8% and banks in Country A do not hold excess reserves currently. i. If the Central Bank now has a target to increase the economy's money supply by $4,000 million, what amount of bonds will the government need to buy or sell? ii. Assume the Central Bank conducts the open-market operations, state one situation that might cause the increase in the economy's money supply to be lower than the Central Bank's target?

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Expert Answer

Step 1

A.

(i) It is given that RRR (Required Reserve Ratio) = 8% and deposits = 200,000; therefore,

Excess reserves = 1/RRR * Deposits

Excess reserves = 1/0.08 * 200,000

Excess reserves = 84,000

Thus, the ECB bank of country A will hold an excess reserve of $84,000.  

(ii) Since, the excess reserves are positive in country A; therefore, the level of money supply in the economy will increase. Here, i...

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