Following the outbreak of the coronavirus pandemic, the economies around the world including the UAE economy experienced

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Following The Outbreak Of The Coronavirus Pandemic The Economies Around The World Including The Uae Economy Experienced 1 (130.31 KiB) Viewed 59 times

Following the outbreak of the coronavirus pandemic, the economies around the world including the UAE economy experienced a slowdown of economic activity leading, potentially, to an economic recession. Depositors in commercial banks have started to worry about their checking accounts in commercial banks since many companies may not be able to meet their loans commitments. Therefore, the central bank of UAE has decided to intervene using an expansionary monetary policy, which means increasing the money supply in the economy in order for the private sector (firms and households) to continue to have access to low-cost funding; one of the tools the UAE central bank has used is the discount rate. This would help manage the aggregate demand (by helping the consumers and the investors) and the aggregate supply (helping businesses) in a way that reduces the negative impact of COVID 19 on economic growth.
Commercial banks may borrow from the central bank. The interest rate they pay to the central bank is the discount rate. When banks increase their borrowing, the money supply increases. The adjustments adopted by the UAE central bank were successful to guarantee an acceptable level of liquidity to businesses and commercial banks' depositors. This policy should continue in the same manner. Assume that there is only one commercial bank in the country and the required reserve ratio is fixed. Use the information in the table below to answer the following questions (All figures in Billions of Dollars): Panel 1: No Commercial Bank Borrowing from the Central Bank (CB) Federal Reserve Commercial Banks Assets Liabilities Assets Liabilities Securities $160 $80 Reserves Reserves $80 $400 Deposits $80 Currency Loans $320 Panel 2: Commercial Bank Borrowing $20 from the Central bank Federal Reserve Commercial Banks Assets Liabilities Assets Liabilities Securities $160 $100 $500 Deposits $100 Reserves (+$20) Reserves (+$20) Loans $20 $80 Currency Loans $420 $20 Amount owed to CB (+$20) A. Calculate the initial required reserve ratio according to data in panel 1. B. Predict the initial level of quantity of money supplied (M1) according to data in panel 1. C. Estimate the money multiplier according to data in panel 2. D. Apply the increase in reserves due to borrowing money from the central bank and the money multiplier to estimate the increase in loans given by the commercial bank if the bank is fully loaned up. E. Predict the new level of quantity of money supplied (M1) due to borrowing money from the central bank.