Neco Model Questions Vol1 2024 Economics Question 8

Practice essay / theory question 8 from the 2024 Neco Model Questions Vol1 Economics examination. This question covers Money and Banking, Reserve Requirements, Open‑Market Operations, Money Multiplier .

Neco Model Questions Vol1 2024 Economics Essay / Theory
Topics: Money and Banking Reserve Requirements Open‑Market Operations Money Multiplier
Question 8 NECO_MODEL_QUESTIONS_VOL1 • 2024 • ECONOMICS • essay

The Central Bank of Nigeria (CBN) operates with a required reserve ratio of 15 %. At the start of the year, commercial banks hold total reserves of ₦2,500 billion (required plus excess) and total deposits of ₦18,000 billion. The CBN then conducts an open‑market purchase of government securities worth ₦800 billion, paying for them by crediting the reserve accounts of the banks.

Question Parts

( a )
Calculate the amount of required reserves that banks must hold before the open‑market operation.
( b )
Determine the level of excess reserves held by banks before the operation.
( c )
After the open‑market purchase, compute the new total reserves, the required reserves (assuming deposits have not yet changed), and the new excess reserves.
( d )
Assuming banks lend out all excess reserves, calculate the maximum possible increase in the money supply that could result from this operation.
( e )
Explain two reasons why the actual increase in the money supply might be lower than the theoretical maximum calculated in part (d).

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About This Question

This is Neco Model Questions Vol1 2024 Economics Question 8. It is one of the essay questions from the 2024 Neco Model Questions Vol1 Economics examination.

The question covers Money and Banking, Reserve Requirements, Open‑Market Operations, Money Multiplier .

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