8. 1.00 points While Jon is walking to school one morning, a helicopter flying o

Question

8. 1.00 points While Jon is walking to school one morning, a helicopter flying overhead drops a $100 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 15 percent of its money in reserves: a. How much money can the bank initially lend out? Instructions: Round your response to two decimal places. b. After this initial transaction, by how much is the money in the economy changed? Instructions: Round your response to two decimal places. c. What's the money multiplier? Instructions: Round your response to one decimal place. d. How much money will eventually be created by the banking system from Jon's $100? Instructions: Round your response to two decimal places.

Explanation / Answer

Answer

a) As he reserves 15% hence bank lend out remaining 85% of 100 which equals $85.

b) Using part (a) money changed by 100 + 85 - 100 = $85(increased)

c) Money multiplier = 1/(reserve ratio) = 1/(0.15) = 1/0.85 = 6.7

d) Total Money created = Money Multiplier * Deposits

= 6.7*100 = 670

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