End Of CH Que NO: 1

Imagine that the banking system receives additional deposits of £100 million and that all the individual banks wish to retain their current liquidity

Imagine that the banking system receives additional deposits of £100 million and that all the individual banks wish to retain their current liquidity ratio of 20 per cent.

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(a)  How much will banks choose to lend out initially?

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(b)  What will happen to banks’ liabilities when the money that is lent out is spent and the recipients of it deposit it in their bank accounts?

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(c)  How much of these latest deposits will be lent out by the banks?

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(d)  By how much will total deposits (liabilities) eventually have risen, assuming that none of the additional liquidity is held outside the banking sector?

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(e)  How much of these are matched by (i) liquid assets; (ii) illiquid assets?

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(f)   What is the size of the bank deposits multiplier?

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(g)  If one-half of any additional liquidity is held outside the banking sector, by how much less will deposits have risen compared with (d) above?

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