1. The government creates a brand new $1000. Fill in the missing data to trace w
ID: 1192849 • Letter: 1
Question
1. The government creates a brand new $1000. Fill in the missing data to trace what happens with that money.
2. So far how much money is available in deposits to be spent?
3. Find the deposit multiplier.
4. What is the final maximum expansion of the money supply from the initial $1000?
Deposits
RRR = 12.5%
Excess Reserves
Loans
Deposits
RRR = 12.5%
Excess Reserves
Loans
Explanation / Answer
1. The government creates a brand new $1,000. It deposits that in bank.
Deposits Required reserves Excess reserve Loans
1000 0.125(1000) (1-0.125)(1000) (1-0.125)(1000)
(1-0.125)(1000) 0.125(1-0.125)(1000) (1-0.125)2(1000) (1-0.125)2(1000)
(1-0.125)2(1000) 0.125(1-0.125)2(1000) (1-0.125)3(1000) (1-0.125)3(1000)
(1-0.125)3(1000) 0.125(1-0.125)3(1000) (1-0.125)4(1000) (1-0.125)4(1000)
.. ... ... ...
... ... ... ...
2. Immediately after intial deposit is made, money available in the deposits to be spent is $1,000.
3. The required reserve ratio is 0.125. Therefore,
deposit multiplier = 1/0.125 = 8
4. The maximum expansion of the money supply from the initial deposit is:
Maximum expansion = 1000 (deposit multiplier) = 1000(8) = $8,000
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