Suppose that Person A deposits $150 (cash) at Bank A. Complete the following questions.
Note: Keep as much precision as possible during your calculations. Your final answer should be accurate to at least two decimal places.

a) Suppose Bank A realizes that, on average, its customers only withdraw a portion of their deposits, and so it can lend out some money to other customers. Bank A now chooses the reserve ratio to be 30% or 0.3. Bank A lends out the remaining amount of money as loans to Person B. Record the effect of this transaction on the balance sheet below:

AssetsLiabilities

Reserves = $0

Deposits = $0

Loans = $0

b) Person B borrows this money as loans from Bank A and pays to Person C. Suppose Person C deposits this amount with Bank B. Bank B, similar to Bank A, also chooses a reserve ratio of 0.3 and issues the remaining cash as loans to Person D. Record the effect of this transaction on the balance sheet below:

AssetsLiabilities

Reserves = $0

Deposits = $0

Loans = $0

c) Person D borrows this money as loans from Bank B and pays to Person E. Suppose Person E deposits this amount with Bank C. Bank C also chooses a reserve ratio of 0.3 and issues the remaining cash as loans to Person F. Record the effect of this transaction on the balance sheet below:

AssetsLiabilities

Reserves = $0

Deposits = $0

Loans = $0

d) What is the money multiplier? Use your answer to find the amount of new money supply created.

Money multiplier = 0 Amount of new money created = $ 0

e) Suppose the reserve ratio is now 0.4. If Person A had deposited his $150 now, what would be the amount of money created now?

Amount of new money created = $0
 
 
 
 

Answer rating: 100% (QA)

Answer A Assets Liabilities Reserve 18 Deposit 180 Loan 162 B Assets ... View the full answer