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Suppose that the T-account for Scotiabank is as follows:
(a) If the Central Bank requires banks to hold 10 % of deposits as reserves, how much in excess reserves does Scotiabank holds?
(b) The Central Bank requires banks to hold a reserve ratio of 5% in 2019 and 20% in 2020. Calculate the money multiplier for each year.
(c) “The amount of reserves banks hold is related to the amount of money the banking system creates through the money multiplier”. Discuss briefly the impact of this statement in terms of the two answers derived for the money multiplier in part (b).
2. Assume that the banking system has deposits of $100 billion. Assume also that the required reserves are 10% of chequing deposits and that banks hold no excess reserves and households hold no currency.
(a) Calculate the money multiplier.
(b) Calculate the money supply.
(c) Suppose the central bank raises the required reserves to 20% of deposits. Calculate the new money multiplier and the new money supply.
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