Monetary system

Posted on 2014-11-29 12:49:00 in Economics by NON

Commercial banks in United Economy have total deposits of AED 300 billion. Their reserves are AED 15 billion, two- thirds of which are with the Central Bank as deposits. There are AED 30 billion notes outside the banks. There are no coins!

 

Calculate-

a)The monetary base.  

b)The banks’ reserve ratio.  

c)Currency drain as a % of deposits.  

 

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Suppose Mr. Y deposits AED 100,000 into a one-year Certificate of Deposit at 5% interest. The Central Bank sets the reserve ratio for the banks at 10%.

a)Illustrate how the banks create money with the help of given information.

(Show first 5 steps) 

b)Calculate the total money creation in the economy with the help of formula.

 

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