Question

UBL Bank currently has PKR 4600 million in transaction deposits on its balance sheet. The State Bank of Pakistan has currently set the reserve requirement at 10 percent of transaction deposits. If the State bank decreases the reserve requirement to 8 percent, reflect the result of this transaction on the balance sheet of UBL and effect of this change on its balance sheet

Answer 1

UBL Bank

The result of this decrease in the reserve requirement in the balance sheet is reflected on the total amount of money created by UBL Bank increasing from PKR 46,000 million to PKR 57,500 million.

Explanation:

Current transaction deposits on balance = PKR 4,600 million

Reserve requirement = 10 percent of transaction deposits

This implies that UBL Bank can create more money up to (4,600/0.1) million = PKR 46,000 million

If the State Bank of Pakistan decreases the reserve requirement to 8 percent, the money creation ability of UBL Bank will increase to (4,600/0.08) million = PKR 57,500 million

The effect of this change on its balance sheet is PKR 11,500 million. This implies that UBL Bank's ability to create money is increased by PKR 11,500 million.