Question

Money Multiplier Scenario Sarah Saver goes to Investors National Bank and deposits $1,000 that she came from her summer job. She now has a checking account with a balance of $1,000 from which she can write checks. What will Investors National Bank do with this newly deposited money? Well, if there is a 10 percent reserve requirement, the bankers will put $100 in their vault and lend out the rest to people who need loans, Say Ernie Entrepreneur walks into Investors National wanting to borrow $900 to start his new catering business. If the bankers decide that his project is worthwhile and he meets their criteria for a loan, they will give him the $900. If Ernie puts the $900 in his checking account, he can then write checks for that amount. There is now $1,900 of money available ($1,000 in Sarah's checking account and $900 in Emnie's) to be spent. In other words, $900 of new money has been created". If Ernie deposits a profit of $500 from the grand opening of his business, the money supply grows some more. The process now continues when Vera Vacationer comes into Investors National to borrow for her trip to Hawaii. The bank lends_out of Ernie's deposit, while putting in reserves and thus "creates" more money. If Vera deposits $200 after her trip, the money supply again grows. Finally, Stan Student walks in to borrow for his college textbooks. The bank lends out of Vera's deposit and put _ in reserves, creating additional money once again Deposit Reserve requirement Money multiplier Potential money creation $1000 10% S2000 15% $3000 20%

Answer 1

Ernie at first puts $900 dollars as deposits and then puts $ 500 as deposit. Totol deposit by her $1400. Now bank would keep 10% i.e $140 and give $ 1260

Bank lends out $180 of vera's deposits and put $20 in reserves

now coming to the question,

Money Deposit RR potential Multiplier money creation 10 9000 al $ 1000 11220 10% 15% 20% b) $ 2000 6.6 12000 5 c) $3000

The formula that we used in order to find out Money multiplier is

1/RR

i.e for a) we have 10% RR, so Money Multiplier is 1/0.1 = 10

Now to have potential money creation we need to first find out total deposits. We find out total deposits by Multiplying the Money Multiplier with the deposit.

So in case a) we have deposit = $1000 and Money multiplier as 10 hence total deposit is $10000

Now out of that 10% should be kept as reserve i,.e 1000

Hence total money creation is 10000-1000 = $ 9000

Like that one can find the rest of the case.