Assignment Two

1- If the central bank lends the National Bank a discount loan of $ 100 million,
show the effect using both the national bank and the central bank balance
sheets, then mention the net effect on monetary base.

2- Use the suitable T-accounts to describe what happens to the monetary base
in the following instances:
 The Central Bank sells $10 million of securities to banks.
 The Central Bank buys $97 million of securities from banks.
 Banks borrow $897 million from the Central Bank.
 Banks repay $80 million of loans to the Central Bank.
 If the non-bank public decided to withdraw a $ 10 million deposits from the
Banking system.

3- If the required reserve ratio is 10 percent, currency in circulation is $400

billion, checkable deposits are $800 billion, and excess reserves total $0.8
billion, calculate the M1 money multiplier.

Name ; Amr diab saad al din

ID; 20194783

THE SOLUTION
 1.
Lender (CB)
Assets Liabilities
discount loan 100M Reserves 100M

Borrower (NB)
Assets Liabilities
Reserves 100M Borrowings from CB 100M

MB = R + C, Reserves can increase, Monetary Base will

increase
and the Money Supply will be decrease.

2.

1
Seller (CB)
Assets Liabilities
Securities -10M Reserves -10M

Buyer (NB)
Assets Liabilities
Reserves -10M
Securities 10M

2
Buyer (CB)
Assets Liabilities
Securities 97M Reserves 97M
 Seller (NB)
Assets Liabilities
Reserves 97M

Securities 97M

3
Lender (CB)
Assets Liabilities
CB Lends to NB (discount loan) Reserves 897M
897M

Borrower (NB)
Assets Liabilities
Reserves 897M Borrowings from CB 897M

4
Lender (NB)
Assets Liabilities
Reserve -80M NB gives back $ to CB (discount loan)
-80M

Borrower (CB)
Assets Liabilities
Borrowings from NB -80M Reserves -80M
5
Non-Bank Public
Assets Liabilities

Checkable Deposits - 10M

Currency in circulation 10M

6 Banking system
Assets Liabilities
Reserves -10M Checkable Deposit -100M
 CB

Assets Liabilities
Reserves -10M

Currency in circulation
10M

3.
M1 = M1 Money Supply, MB = Monetary Base, C = Currency in
Circulation = 400M, D = Checkable Deposits = 800M, R = Actual
Reserves, ER = Excess Reserves = 0.8M, rrr = Required Reserve Ratio =
10% =0.1

 M1 money multiplier = M1/MB

 M1 money multiplier = C+D/R+C
 M1 money multiplier = C+D/rrr*D+ER+C
 M1 money multiplier = 400M+800M/0.1*800M+0.8+400M
 M1 money multiplier = 2.49M = 2.5M