Consider an individal who moves from Asia to the US and brings with him life savings of $40,000, which he deposits in a US bank. For each of the cases below, compute the overall change in deposits and reserves in the US banking system as a resultof this new deposit.
a) 10% target reserve ratio; no cash drain; no reserve excess reserve
b) 10% target reserve ratio; 5% cash drain; no excess reserves
c) 10% target reserve ratio; 5% cash drain; 5% excess reserves
This is a good question for students to see the different roles of bank reserves and the public's cash drain in affecting the extent of money creation stemming from a new deposit. In this question, let X be the injection of cash into the ...
The different roles of bank reserves are featured.