Answer:
Based on the given information, we can calculate the initial required reserves as follows:
Required Reserves = Reserve Ratio * Deposits
Required Reserves = 10% * Deposits
Since there are no excess reserves, we can say that the total reserves held by the banks are equal to the required reserves:
Total Reserves = Required Reserves
We can also calculate the currency drain ratio as follows:
Currency Drain Ratio = Currency / Deposits
Currency Drain Ratio = 50%
Now, let's analyze the impact of the central bank's action of increasing the monetary base by $900 billion.
The monetary base includes both currency in circulation and reserves held by banks at the central bank. The increase in the monetary base will lead to an increase in reserves held by banks. The new level of reserves can be calculated as follows:
New Reserves = Total Reserves + Increase in Monetary Base
The increase in the monetary base is $900 billion, so we can substitute this value in the above equation:
New Reserves = Total Reserves + $900 billion
Since there are no excess reserves initially, the total reserves are equal to the required reserves:
Total Reserves = Required Reserves = 10% * Deposits
Substituting this value in the above equation, we get:
New Reserves = 10% * Deposits + $900 billion
The currency drain ratio tells us what fraction of deposits are held as currency. Therefore, the remaining fraction is held as deposits. Using the currency drain ratio, we can calculate the new level of deposits as follows:
New Deposits = (1 - Currency Drain Ratio) * Deposits
Substituting the given value of the currency drain ratio, we get:
New Deposits = (1 - 50%) * Deposits
New Deposits = 50% * Deposits
Now that we have the new levels of reserves and deposits, we can check whether the banks have excess reserves or not. Excess reserves are calculated as follows:
Excess Reserves = Total Reserves - Required Reserves
If the excess reserves are positive, the banks have reserves in excess of what is required, and if they are negative, the banks have a reserve shortfall.
Let's calculate the excess reserves using the new levels of reserves and deposits:
Excess Reserves = New Reserves - Required Reserves
Excess Reserves = (10% * Deposits + $900 billion) - (10% * Deposits)
Excess Reserves = $900 billion
Since the excess reserves are positive, the banks have excess reserves after the increase in the monetary base.
Overall, the central bank's action of increasing the monetary base by $900 billion leads to an increase in both reserves and deposits. The banks have excess reserves, indicating that they have more reserves than what is required by the reserve ratio.
Step-by-step explanation: