Purchase Solution

How is money created?

Not what you're looking for?

Ask Custom Question

Suppose Bank A, which faces a reserve requirement of 10 percent, receives a $1000 deposit from a customer.

a. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show your answer on Bank A's balance sheet.

b. Assuming that the loan shown in Bank A's balance sheet is redeposited in Bank B, show the changes in Bank B's balance sheet if it lends out the maximum possible.

c. Repeat this process for three additional banks: C, D, and E.

d. Using the simple money multiplier, calculate the total change in the money supply resulting from the $1000 initial deposit.

e. Assume Banks A, B, C, D, and E each wish to hold 5 percent excess reserves. How would holding this level of excess reserves affect the total change in the money supply?

Purchase this Solution
Solution Summary

The solution illustrates the process of creation of money. It is included in an attached Word and Excel file.

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • Money Supply Multipliers And Reserves

    reserve ratio Multiplier when the reserve ratio is .1 , M=1/r= 1/.1=10 a) How much new money could be created?

  • maximum amount of new money that can be created in the banking system

    The money multiplier is 1/Reserve Ratio = 1/30% = 3.33. Hence, the maximum amount of new money that can be created is 3.33 * New Deposit = 3.33 * 6000 = $20000. The maximum amount of new money that can be created is depicted here.

  • money supply

    When the dealer does lend it, it will create a demand deposit account for the borrower and since a demand deposit is a part of the M1 money supply, money has now been created.

  • Money Supply Calculations

    (c) If people deposit the entire $5000 worth of bills in banks that are required to observe a 20% reserve requirement, how large is the money supply? (d) In part (c), what portion of the money supply was created due to banks?

  • Fed funds rate in the banking system

    How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit?

  • Prepare an analysis on the Reserve requirements

    If the money multiplier is 5, how much money will ultimately be created by this event? 5. If the Fed wanted to implement a contradictory monetary policy using reserve requirement, how would that work?

  • Velocity, Inflation, and Money Supply

    164735 Velocity, Inflation, Money Supply How would I find the rate the Fed should let the money supply grow in order to completely stop inflation, if the velocity of money is increasing by 3% and the economy is growing at a rate of 2.5% a year.

  • Feed the Pig: Cost cutting measures, savings per year

    Your tutorial is attached. I found three savings ideas on feedthepig.org and then created a savings analysis.

  • Potential Money Supply Increase And Process of Creation

    Identify the potential amount of the money supply increase as a consequence of the Fed's action and describe fully how money is created by the banking system subsequent to the Fed's open market purchase of Treasury securities in the amount of $1 billion

  • Three Basic Demands for Money

    505431 Three Basic Demands for Money Money is an interesting topic and there is much to learn that is not common knowledge regarding how we create money, especially money that is just printed!

View More Related Solutions