While Jon is walking to school one morning, a helicopter flying overhead drops a
ID: 2442243 • Letter: W
Question
While Jon is walking to school one morning, a helicopter flying overhead drops a $20 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 10 percent of its money in reserves: a. How much money can the bank initially lend out? Instructions: Round your response to two decimal places s95 b. After this initial transaction, by how much is the money in the economy changed? Instructions: Round your response to two decimal places s195 c. What's the money multiplier? Instructions: Round your response to one decimal place. 20 d. How much money will eventually be created by the banking system from Jon's $20? Instructions: Round your response to two decimal places.Explanation / Answer
(a) Amount the bank can initially lend out = $18.00
[Required reserves = Increase in deposits x Reserve ratio = $20 x 10% = $2
Possible lending amount = Excess reserve = Increase in deposit - Required reserve = $20 - $2 = $18]
(b) Amount of money changed in the economy = $38.00
[Increase in money = Increase in deposit + Increase in loan = $20 + $18 = $38]
(c) Money multiplier = 10.0
[Money multiplier = 1 / Reserve ratio = 1 / 0.1 = 10]
(d) Money created by banking system = $200.00
[Money created = Increase in deposit x Money multiplier = $20 x 10 = $200]
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