Describe how will a bank creates bank money when initial demand deposit is $2000, required ratio...
Describe how will a bank creates bank money when initial demand deposit is $2000, required ratio is 5% and lending the excess reserve to three borrowers.
Homework Answers
Bank creates money based on the reserve requirement. Under the fractional reserve system, bank can create money:
First Borrower:
First Bank Balance Sheet:
| Assets | Liabilities |
|
Reserve:100 Loan: 1900 |
Deposit: 2000 |
Second Bank Balance Sheet
| Assets | Liabilities |
|
Reserve:95 Loan: 1805 |
Deposit: 1900 |
Third Bank Balance Sheet:
| Assets | Liabilities |
|
Reserve:90.25 Loan: 1714.5 |
Deposit: 1805 |
Money Multiplier = 1/rr
= 1/0.05
= 20
Money Supply = 20*2000
= $40,000
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