Answered: What are demand deposits and why should…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 2CQQ

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Question

a) What are demand deposits and why should they be included in the stock of money?

b) Explain whether each of the following events increases or decreases the money supply.
i. The State Bank of Pakistan sells bonds in open-market operations.

ii. The State Bank of Pakistan increases the reserve requirement.

iii. The State Bank of Pakistan reduces the interest rate it pays on reserves.

iv. MCB Bank repays a loan it had previously taken from the State Bank of Pakistan.

v. After a rash of pickpocketing, people decide to hold less currency.

vi. Fearful of bank runs, bankers decide to hold more excess reserves.

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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