a) Consider a fully loaned out banking system, consisting of banks X, Y, and Z which is
Question:
a) Consider a fully loaned out banking system, consisting of banks X, Y, and Z which is subjected to a cash reserve requirement of 20%. Assume as a student you have savings amounting to Ksh15000 and you bank with Bank A. After depositing Ksh15000 in your account, your bank gives a loan to its customer Alex Mwadodo who in turn deposit the amount in Bank B. His bank loan out his deposit to Lawrence Mwachuma who turn deposits this amount into Bank C
i. Demonstrate, using appropriate T-accounts (Balance Sheet) of each bank and show how the banks would create money from your deposit.
ii. What is credit multiplier? In this case what is the value of the credit multiplier?
b) Suppose the Central Bank of Kenya pursues an aggressive Restrictive policy by increasing the reserve requirements to 25% in an attempt to control inflation. What is the effect of such a policy on the Credit Multiplier and Money Supply? Justify your answer.
Expert Answer:
i Bank A Bank A Deposits Ksh 15000 Reserve requirement cash reserve requirement depositReserve requi... View the full answer
