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
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.

Basics of Economics

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

Elementary Microeconomics

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

Economics, Basic Concepts, Demand-Supply-Equilibrium

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