Question 1
The banking system plays a crucial role in carrying outmonetary policy. Through the credit process within commercialbanks, quantities of money are created for theeconomy.
a) In order to boost economic growth, the central bank ofCountry Y has injected $500 billion of new money into the bankingsystem. If the required reserve ratio (RR) for bank deposits inCountry Y is 20%, compute the maximum increase in money supply thatthe additional funds can create in the following scenarios:
i. Commercial banks in Country Y lend all their available fundsto their loan customers under the current reserves requirement. Atthe same time, the public does not keep any cash on hand anddeposit all their money to banks.
ii. Suppose the public keeps one third of their funds in form ofcash and deposit the rest with their banks. In addition, commercialbanks hold 5% excess reserves (ER) on top of the required reservefor the deposits they receive.
b )With reference to your answers in (a), explain in detail whya central bank in reality cannot control the exact amount of moneyin circulation with the practice of monetary policy.
