Question

1. Suppose banks hold 10% reserves (although there is no legal reserve requirement banks still hold reserves for safety reasons). Suppose the public sector printed $10,000 in currency to pay its bills and suppose households deposited the currency into the banking system. How much of an increase would there be in the level of demand deposits and loans?

2. What would happen if, afterwards, the central bank sold $5000 in securities to buyers in the secondary market?

Answer 1

Answer 1.if household deposited $10, 000 in bank then bank hold reserve against such deposits;

Reserve = $10, 000 × 10 % = $1000

Excess amount to be lent out as loan =$10, 000 - $1000 =$9000

Money supply = excess reserve × 1/reserve ratio

=$9000 × 1/10% = $9000 × 10 =$90, 000

The level of demand deposits will increase by $90, 000.

Level of loan will increase by =$90, 000 × 90 %

=$81, 000

Answer 2.) If central bank sold $50, 000 securities then ghe central bank will receive $50, 000 . Through this way central bank reduce the money supply from market.