Question

2. Suppose that the banks of the nation of Atlantis have a reserve ratio of 20%, and there is a new deposit of $500,

and that the people of Atlantis have no desire to hold currency.

a) Complete the following table.

Round           Deposits            Required Reserves          Excess Reserves               Loans

1                         $500                    $100                                             $400                    $400

2                        $400

3

4

5

6

7

8

9

10

Total after 10 rounds

b) What is the money multiplier?

Answer 1

Solution:-

(A).

Round	Deposits	Required Reserves	Excess Reserves	Loans
	A	B = A * 20%	C = A - B
1	$500	$100	$400	$400
2	$400	$80	$320	$320
3	$320	$64	$256	$256
4	$256	$51.2	$204.8	$204.8
5	$204.8	$40.96	$163.84	$163.84
6	$163.84	$32.77	$131.07	$131.07
7	$131.07	$26.21	$104.86	$104.86
8	$104.86	$20.97	$83.89	$83.89
9	$83.89	$16.78	$67.11	$67.11
10	$67.11	$13.42	$53.69	$53.69
Total	2231.56	446.31	1785.25	1785.25

(B). Money Multiplier = 1 / Required Reserve

                                         = 1 / 0.20

                                         = 5