Gce Model Questions Vol1 2018 Economics Question 8

Practice essay / theory question 8 from the 2018 Gce Model Questions Vol1 Economics examination. This question covers Money and Banking .

Gce Model Questions Vol1 2018 Economics Essay / Theory
Topic: Money and Banking
Question 8 GCE_MODEL_QUESTIONS_VOL1 • 2018 • ECONOMICS • essay

The Central Bank of Econland currently requires commercial banks to hold a reserve ratio of 10 % of deposits. In practice, banks also keep excess reserves equal to 5 % of deposits. The existing money supply (M) is ₦200 billion. The marginal propensity to consume (MPC) is 0.8.\n\nThe Bank is contemplating two policy actions: (i) an open‑market purchase of government securities worth ₦30 billion, and (ii) a reduction of the statutory reserve requirement from 10 % to 8 %. Evaluate the likely impact of these actions on the money supply, interest rates and inflation.

Question Parts

( a )
Calculate the current money multiplier and the total amount of deposits that the banking system can support given the reserve requirement and excess reserves.
( b )
Assuming the central bank purchases ₦30 billion of securities and that the reserve requirement and excess reserves remain unchanged, calculate the new theoretical money supply.
( c )
Now suppose the reserve requirement is lowered to 8 % while the open‑market purchase of ₦30 billion is still carried out. Calculate the new money multiplier and the resulting money supply under this combined policy.
( d )
Discuss the potential short‑run effects of the combined policy on (i) interest rates, (ii) credit availability, and (iii) inflationary pressure, linking your answer to the liquidity effect and the expectations‑augmented Phillips curve.

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About This Question

This is Gce Model Questions Vol1 2018 Economics Question 8. It is one of the essay questions from the 2018 Gce Model Questions Vol1 Economics examination.

The question covers Money and Banking .

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