Assuming an economy have only two commercial banks in it banking system, Classic Bank and Prudent Bank. The following shows the balance sheet of the two banks as at 2019. Classic Bank Balance sheet as at December, 2019 GHSm GHSm Assets: Liabilities & Equity: Reserves 1,000 Deposits 3,000 Securities 2,000 Equity 7,000 Loans & Advances 1,000 Property, Plant and Equipment 6,000 . 10,000 10,000 Prudent Bank Balance sheet as at December, 2019 GHSm GHSm Assets: Liabilities & Equity: Reserves 600 Deposits 2,500 Securities 1,500 Equity 4,400 Loans & Advances 800 Property, Plant and Equipment 4,000 . 6,900 6,900 Assume a required reserve ratio of 10%. (a) What is the amount of excess reserves in this commercial banking system? (b)What is the maximum amount that the money supply can be expanded? What would be the effect of a fall in reserve ratio to 5%, on the maximum amount that the money supply can be expanded? (c) Determine the stock of broad money supply assuming the non-bank public holds notes and coins of GHS4,000million. (d)Suppose Classic bank makes additional loans of GHS300 million to its customers and some of these customers use GHS150 million to make payment to other depositors of the same bank and GHS150 million to make payments to clients of Prudent bank. (i) Draw up the new balance sheets of each bank Classic Bank Balance sheet as at December, 2019 GHSm GHSm Assets: Liabilities & Equity: Reserves Deposits Securities Equity Loans & Advances Property, Plant and Equipment Prudent Bank Balance sheet as at December, 2019 GHSm GHSm Assets: Liabilities & Equity: Reserves Deposits Securities Equity Loans & Advances Property, Plant and Equipment (ii) Determine the stock of broad money holding the assumption made in part (c) (iii) What is the multiplier effect of money supply
Assuming an economy have only two commercial banks in it banking system,
Classic Bank and Prudent Bank. The following shows the balance sheet of the two
banks as at 2019.
Classic Bank
Balance sheet as at December, 2019
GHSm GHSm
Assets: Liabilities & Equity:
Reserves 1,000 Deposits 3,000
Securities 2,000 Equity 7,000
Loans & Advances 1,000
Property, Plant and Equipment 6,000 .
10,000 10,000
Prudent Bank
Balance sheet as at December, 2019
GHSm GHSm
Assets: Liabilities & Equity:
Reserves 600 Deposits 2,500
Securities 1,500 Equity 4,400
Loans & Advances 800
Property, Plant and Equipment 4,000 .
6,900 6,900
Assume a
(a) What is the amount of
(b)What is the maximum amount that the money supply can be expanded? What
would be the effect of a fall in reserve ratio to 5%, on the maximum amount
that the money supply can be expanded?
(c) Determine the stock of broad money supply assuming the non-bank public
holds notes and coins of GHS4,000million.
(d)Suppose Classic bank makes additional loans of GHS300 million to its
customers and some of these customers use GHS150 million to make
payment to other depositors of the same bank and GHS150 million to make
payments to clients of Prudent bank.
(i) Draw up the new balance sheets of each bank
Classic Bank
Balance sheet as at December, 2019
GHSm GHSm
Assets: Liabilities & Equity:
Reserves Deposits
Securities Equity
Loans & Advances
Property, Plant and Equipment
Prudent Bank
Balance sheet as at December, 2019
GHSm GHSm
Assets: Liabilities & Equity:
Reserves Deposits
Securities Equity
Loans & Advances
Property, Plant and Equipment
(ii) Determine the stock of broad money holding the assumption made in
part (c)
(iii) What is the multiplier effect of money supply
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