HKCEE ECONOMICS | 10.6 Deposit creation | P.

1. 1990/I/2dii
Suppose the banks in Hong Kong do not hold excess reserves and the legal minimum reserve ratio is 25%.
Mr. Chan withdraws HK$10 000 from his savings account with Bank A and keeps the money at home.
(I) Calculate the amount of reserves by which Bank A is falling short of the legal requirement.
Suggest ONE possible way that Bank A can satisfy the reserve requirement again. (5 marks)
(II) Calculate the maximum possible change in the total deposits of the banking sector. (3 marks)

2. 1991/I/5bi,ii,iii
Suppose there are only two banks, A and B, in an economy. They are subject to the same required cash
reserve ratio. Bank B has no excess cash reserves. Their balance sheets are as follows:
Bank A
Assets ($) Liabilities ($)
Cash 50 Deposits 100
Loans 50
Bank B
Assets ($) Liabilities ($)
Cash 200 Deposits 800
Loans 600

(i) Calculate the required cash reserve ratio in the economy. (2 marks)
(ii) Calculate the amount of excess cash reserves of Bank A. (2 marks)
(iii) Now assume Bank A chooses not to hold excess cash reserves. Calculate the maximum possible
increase in the deposits created by the whole banking system. (3 marks)
State TWO assumptions, other than those mentioned above, in arriving at your answer. (4 marks)

3. 1992/I/3bii
In Hong Kong, Miss Wong puts $1,000 cash into The Hongkong and Shanghai Banking Corporation
Limited (HSBC) as a demand deposits.
Explain TWO situations under which this $1, 000 deposit will not lead to a further increase in deposits.
(6 marks)

4. 1993/I/5cii
Suppose Mr. Chan sells his flat to a friend in Canada and receives an oversea remittance which amounts to
HK$3 million. He deposits the HK$3 million in his savings account with a bank in Hong Kong.
Given a reserve ratio of 25%, calculate the possible maximum increase in deposit (including the initial $3
million) of the local banking system. Show your working. (3 marks)

62
 HKCEE ECONOMICS | 10.6 Deposit creation | P.2

5. 1994/I/5
Suppose in a certain economy all the banks keep no excess reserves, and their balance sheet is as follows:
Assets ($) Liabilities ($)
Reserves 240 Deposits 1 200
Loans 960
Suppose someone deposits $100 cash into his bank. What will be the maximum amount of deposits
(including the initial $100) the banking system can create? Show your working. (4 marks)

6. 1995/I/10aiii
Study the following piece of news reported in the USA:
A local singer has volunteered to perform two identical
shows and the sales receipt of the concert tickets will be
donated to the Rwanda refugees in Africa for their food
and medical supply expenses…..
The audience withdrew $ M from their deposits with banks in the US to buy the concert tickets. Suppose the
required reserve ratio of US banks was 20 %, they never kept excess reserve and there was no cash drain.
What would happen to the amount of the total deposit of banks in the US after the withdrawal and donation
to Rwanda? Explain briefly the changing process. (8 marks)

7. 1996/I/11c
Suppose a newspaper publisher raises $5 million capital by issuing shares and deposits the full amount into
the banks in Hong Kong. Assume that the required reserve ratio of the banks in Hong Kong is 25 % that
they do not hold excess reserves and that there is no cash leakage.
Explain what would happen to the amount of the total deposit of the banks in Hong Kong after the shares
issuing is complete if
(i) all the shares are purchased by local people who withdraw deposits from their banks in Hong Kong.
(3 marks)
(ii) all the shares are purchased by foreigners who remit the money required from overseas to settle the
purchase. (4 marks)

8. 1997/I/9c
Suppose the government builds a railway in northwest New Territories.
Suppose that the banks in Hong Kong have no excess reserves and the minimum reserve ratio is 25 % and
that $ 10 billion is borrowed overseas to construct the new railway.
Using the process of deposit creation, explain why the actual amount of bank deposits thus created in Hong
Kong is smaller than the maximum amount of bank deposits can be created. (8 marks)

63
 HKCEE ECONOMICS | 10.6 Deposit creation | P.3

9. 1998/I/9a
Mr Wong received a remittance of HK $1 million from abroad and deposited the entire sum in a bank in
Hong Kong. Later he used part of the money to buy shares and the rest to set up a restaurant.
Suppose the required reserve ratio of the banks in Hong Kong is 25% and the banks have no cash leakage
and do not keep excess reserves.
Explain briefly the process of deposit creation of the local banking system caused by the injection of $1
million. Calculate the total amount of deposits created (including the initial $1 million). (8 marks)

10. 1999/I/6a
Suppose the legal reserve ratio for banks is 25 % and Bank A does not keep excess reserves. Aaron won an
overseas scholarship and received a remittance of $10 000. He deposited it in Bank A. Bank A lent out all
the excess reserves to GiGi. She then deposited the money into Bank B, but Bank B could not find any
borrowers.
Calculate the amount of deposits thus created in the economy. (4 marks)

11. 2000/I/10ai
The balance sheet of the banking system of Economy A is shown below. Suppose all banks do not hold
excess reserves and the public holds $50 mn cash in hand.
Assets ($mn) Liabilities ($mn)
Cash reserves 200 Deposits 1000
Loans 800
Suppose the public now withdraws $10 million cash from the banks.
Calculate the change in the total deposits of the banking system. (3 marks)

12. 2001/I/10b
The balance sheet of a banking system is as follows:
Assets ($m) Liabilities ($m)
Reserves 250 Deposits 1 000
Loans 750
(i) Given that the legal reserve ratio is 20%, calculate the actual reserve ratio and the amount of excess
reserve of the banking system. (4 marks)
(ii) A depositor withdraws $40 m from the banking system and invests the money overseas. If all banks
lend out their remaining excess reserves, what is the maximum possible amount of total deposits in the
banking system? Explain your answer. (4 marks)

64
 HKCEE ECONOMICS | 10.6 Deposit creation | P.4

13. 2002/I/10aii
The balance sheet of a banking system is as follows :
Assets ($Mn) Liabilities ($Mn)
Reserves 20 Deposits 100
Loans 80
The public deposits $10 million of cash into the banking system.
Give TWO possible reasons why the actual change in the money supply could be less than the maximum
possible change. (4 marks)

14. 2003/I/11bii
Using the process of deposit creation, explain how a decrease in demand for loans could affect the deposit
creation ability of the banking system. (4 marks)

15. 2003/I/11c
Suppose the banking system has an excess reserve of $50 million and its balance sheet is as follows :
Assets ($m) Liabilities ($m)
Reserves 250 Deposits 1 000
Loans 750
What is the maximum possible amount of total deposits in the banking system if no banks hold excess
reserves? Show your workings. (4 marks)

16. 2004/I/6
The balance sheet of Economy A's banking system is shown below. The public in this economy always
holds $50 million in cash. Initially, the excess reserve of the banks is $100 million
Assets ($mn) Liabilities ($mn)
Reserves 500 Deposits 2 000
Loans 1 500
Suppose $140 million worth of deposits is withdrawn from these banks and remitted overseas.
(a) Calculate the maximum possible amount of money supply in Economy A after the remittance.
(4 marks)
(b) Explain briefly the process of deposit contraction of the above withdrawal. (4 marks)

65
 HKCEE ECONOMICS | 10.6 Deposit creation | P.5

17. 2005/I/5
Study the following balance sheet of a banking system:
Assets ($mn) Liabilities ($mn)
Reserves 120 Deposits 1 000
Loans 880
Suppose the legal reserve ratio is 10%
(a) Calculate the amount of excess reserve of the banking system. (2 marks)
(b) Suppose all banks lend out all their excess reserves. Calculate the maximum possible amount of total
deposits in the banking system. (2 marks)

18. 2006/I/6
The following is the balance sheet of a banking system.
Assets ($) Liabilities ($)
Reserves 500 Deposits 1 500
Loans 1 000
(a) Suppose the excess reserve of the banks is $350. What is the required reserve ratio?
The required reserve ratio is __________ %. (1 mark)
(b) Suppose there is a cash withdrawal of $350 from the banks. Explain whether the banks still have
excess reserves immediately after the withdrawal. (3 marks)

19. 2007/I/7
Study the following balance sheet of a banking system :
Assets ($) Liabilities ($)
Reserves 1 700 Deposits 7 500
Loans 5 800
Suppose the legal reserve ratio is 20%.
(a) The excess reserve of the banking system is $______________. (1 mark)
(b) Suppose Mr. Chan withdraws $100 from the banking system, of which 70 % is held as cash and the
rest is remitted overseas.
(i) The immediate change in total deposits of the banking system is ______________. (1 mark)
(ii) Therefore, the immediate change in the overall amount of the money supply is ______________.
(2 marks)

66
 HKCEE ECONOMICS | 10.6 Deposit creation | P.6

20. 2008/I/10
The government may reduce the money supply to cool down the overheated economy. The balance sheet of
the banking system is as follows:
Assets ($ million) Liabilities ($ million)
Reserves 1 000 Deposits 5 000
Loans 4 000
Suppose the public in this economy always holds the same amount of cash and the banking system never
holds excess reserves. The central bank increases the minimum reserve ratio of the banks by 5%.
(a) Explain briefly the process of deposit contraction resulting from the above change in the reserve ratio.
(4 marks)
(b) Calculate and explain the change in money supply in the economy resulting from the above deposit
contraction. (5 marks)

67