Assignment # 2
What happens to the overall money supply when a person who sells a government bond to the Central Bank (SAMA) places the proceeds in a local bank?
What is the burden of the public debt?
It may be argued that the effects of a higher public debt are the same as the effects of higher taxes. Why?
What is discretionary fiscal policy? What are automatic stabilizers? Give examples of each.
How does the crowding out effect tend to offset expansionary fiscal policy?
Assume a 5% required reserve ratio, zero excess reserves, no currency leakage, and a ready loan demand. SAMA buys a SR1 million government bond from investment institution.
What is the maximum money multiplier?
By how much will total deposits rise?
If the high powered money “H” in the Saudi Arabian economy is SR600 billion and the money multiplier “m” is 1.5, find out the following:
Total money supply “M” in the money market in Saudi Arabia.
Calculate the Cash-Reserve Ration (CRR).
Assume that the required reserve ratio is 15 percent and that SAMA sells SR3 million worth of government securities to a costumer who pays with a check drawn on the Riyad Bank.
The excess reserve of Riyad Bank changed by how much?
By how much has the money supply changed?
Suppose that the T-account for National Commercial Bank is as follows:
Assets (thousands) Liabilities (thousands)
Reserves SR 100 Deposit SR 800
Loan SR 700
Total SR 800 SR 800
If SAMA requires banks to hold 5% of deposits as reserves requirement, how much in excess reserves does the National Commercial Bank now hold?
If National Commercial Bank decides to reduce its reserves to only the required amount, will the economy’s money supply increase or decrease? Explain.
What is the money multiplier in this economy?
Complete the table below.
Determine the marginal propensity to consume and the marginal propensity to save.
Determine the average propensity to consume and the average propensity to save for each level of income.
Disposable income
Consumption
Saving
SR500
600
700
800
900
1000
SR510
600
690
780
870
960
Suppose that consumption equals SR500 billion and total income equals SR650 billion.
If the marginal propensity to consume is equal to 0.8, what must savings be equal to?
What does the MPS equal?
At the income level of SR650 billion, what does the APC come to?
Consider a closed. Private economy in which C = SR30 + 3/4Y and I = SR25. What will the equilibrium level of real national income (Y) be equal to in this economy? (Hint: In equilibrium real national income must equal total planned expenditures, or Y = C + I.)
Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves, answer the following questions:
The reserve requirement is 25 percent.
Fill in the blanks in the table below.
What is the deposit multiplier?
Multiple Deposit Creation
Round
Deposits
Reserves
Loans
Bank 1
Bank2
Bank3
Bank 4
Bank5
All other banks
Totals
SR1, 000,000
SR
SR
Now the reserve requirement is 5 percent.
Fill in the blanks in the similar table.
What is the deposit multiplier?
Multiple Deposit Creation
Round
Deposits
Reserves
Loans
Bank 1
Bank2
Bank3
Bank 4
Bank5
All other banks
Totals
SR1, 000,000
SR
SR
If the required reserve ratio is 10%, what will be the maximum change in the money supply in each of the following situations?
Abdullah deposits in Riyad bank a check drawn on SAMBA bank.
Abdullah buys a SR5,000 Saudi government bond from Saudi Central Bank by drawing down on his checking account.
Abdullah sells a SR10,000 Saudi government bond to the Saudi Central Bank and deposit the SR10,000 in NCB bank.
Abdullah writes a SR10,000 check on his own account and takes SR1,000 in currency and buries it in his backyard.