Mgt411 Assignment No. 2 solution

"Money and Banking (MGT411)"

Assignment No. 02

Marks: 20

Schedule

Opening Date and Time January 20 , 2011 At 12:01 A.M. (Mid-Night)

Due Date and Time January 26 , 2011 At 11:59 P.M. (Mid-Night)

Assignment

Question No 01

Part (A)

Calculate the impact of an increase in desired currency holdings on the money multiplier from 10% to 15% of deposits when the reserve requirement is 10 percent of deposits, and banks' desired excess reserves are 04 % of deposits.

Assumption:

If the general public held currency Rs. 109 millions and deposit are Rs. 99 millions.

Part (B)

What will be difference in deposits by following a Rs. 3 billion Open Market Purchase assuming a 5% reserve requirement

Assumptions:

1 No excess reserves are held.

2 There are no changes in the amount of currency held by the public

Question No. 2

A commercial bank has following data:

Total assets valued Rs. 1,000,000

Item Assets Liabilities

Interest rate sensitive 35% 45%

Interest rate non‐sensitive 65% 55%

Initial interest rate 08 % 05%

Interest rate increase 3% both in assets and liability

Required:

What will be the increase / decrease in the amount of net‐profit(interest) due to the interest rate change? Your answer should be in absolute figures.

Solution Q No. 2