Question

Question No. 2:                                                                                 (15marks)

Problem 1-                                                                  (5marks)

Calculate the Expected Return on the General Motor Bond if the Return is 11% three-fourth of the time and 7% one fourth of the Time.

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Problem 2-                                                                

Suppose $150 of currency is in circulation. What is the banks’ impact on money supply?
Calculate the money supply in case of Fractional reserve banking system. Pretend the Reserve Ratio is by 2.5%.

1. Borrowers first withdrew the loan from 1^st National Bank and deposited it in 2^nd National Bank.
2. Borrowers Took The Loan from 2^nd National Bank and Deposited it in 3^rd National Bank
3. Then Borrowers withdrew finally the loan from 3^rd National Bank and deposited it in 4^th National Bank.

Questions:

1. Open a T Account for each Bank with the previous situations.
2. Show the Impact on money supply (How much the $150 of reserves had generated?)

2nd National Bank	1st National Bank
4th National Bank	3rd National Bank

Answer 1

Q1) Expected return = weight × return

= 0.75 × 11% + 0.25 × 7%

= 8.25% + 1.75%

= 10%

Q2)

A) T - account of all the banks are shown below

B) The total money which can be created

= initial deposit × 1 / reserve requirement

= 150 × 1/ 0.025

= 150 × 40

= $6,000