Answered: anks in New Transylvania have a desired…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 12PA

See similar textbooks

Related questions

Question

Banks in New Transylvania have a desired reserve ratio of 10 percent of deposits and no
excess reserves. The currency drain ratio is 50 percent of deposits. Now suppose that the
central bank increases the monetary base by $900 billion.
i. How much do the banks lend in the first round of the money creation process?
ii. How much of the initial amount loaned flows back to the banking system as new
deposits?
iii. How much of the initial amount loaned does not return to the banks but is held
as currency?
iv. Why does a second round of lending occur?
v. Calculate money multiplier in this example?
vi. What is the final increase in the quantity of money?

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions