Answer to Question #172139 in Macroeconomics for sahil

Question

 Assume that the required reserve ratio is 25 percent, The desired currency to deposit ratio and the desired excess reserve ratio are both zero. If there is an open market purchase of Rs. 250000/-. What will happen to the following? (i) Total deposits of the banking system (ii) (iii) Loans Total reserve

Answer 1

let Change in Demand Deposits be ADD

let Change in Reserves be AR

let Required Reserve ratio be r

Therefore $ADD=AR/r$

250,000/25%

1,000,000

Bank demand Deposits will increase by 250,000

Reserves will be 25%*250,000

=62,500

Excess Reserves will be constant but the loans total reserves will increase by 75%*250,00

= 187,500

Money supply will continue to increase till there are no excess reserves in the bank.