Nepal Rastra Bank is responsible for fine tuning the money supply in the banking system. The most commonly used monetary tools used by central banks around the world to manage money supply condition…

Nepal Rastra Bank is responsible for fine-tuning the money supply in the banking system. The most commonly used monetary tools used by central banks around the world to manage money supply condition are open market operations, discount window loans, and required reserve ratios. The required reserve ratio is particularly the ratio of the deposits held by commercial banks which must be placed at the account maintained at the central bank, and the bank cannot lend it out. Increased required reserve ratio usually mean the less amount is available for credit which ultimately lowers the total amount of money in entire banking system and vice versa. To see an effect of change in required reserve ratio to banking deposits, for example, assume a typical commercial bank that reports existing transaction deposit of Rs 500 billion on its balance sheet. The current required reserve ratio set by centra bank is 8 percent. If the new required reserve ratio is set 7 percent, answer the required that follows below. a. Mention the major issues discussed in this given text. b. Show the initial balance sheet of the central bank and the commercial bank in a simplified version. c. Calculate the change in transaction deposit and new level of deposits if this commercial bank converts 80 percent of its excess reserves to loans and borrowers return 70 percent of these funds to the commercial bank as transaction deposits. d. Show the balance sheet of the central bank and the commercial bank for the given case (c), assume there is only one commercial bank in the banking system. e. Why do you think the negative relationship exist between the change in required reserve ratio and deposit expansion/contraction in the banking system?