Question

Calculate the money supply in case of Fractional reserve banking system. Pretend the Reserve Ratio is by 5%.

1. Borrowers first withdrew the loan from 1^st National Bank and deposited it in 2^nd National Bank.
2. Borrowers Took The Loan from 2^nd National Bank and Deposited it in 3^rd National Bank
3. Then Borrowers withdrew finally the loan from 3^rd National Bank and deposited it in 4^th National Bank.

Questions: a- Open a T Account for each Bank with the previous situations.

b-Show the Impact on money supply (How much the $75 of reserves had generated)

Calculate the money supply in case of Fractional reserve banking system. Pretend the Reserve Ratio is by 5%.

1. Borrowers first withdrew the loan from 1^st National Bank and deposited it in 2^nd National Bank.
2. Borrowers Took The Loan from 2^nd National Bank and Deposited it in 3^rd National Bank
3. Then Borrowers withdrew finally the loan from 3^rd National Bank and deposited it in 4^th National Bank.

Questions: a- Open a T Account for each Bank with the previous situations.

b-Show the Impact on money supply (How much the $75 of reserves had generated)

Answer 1

The total money supply in the economy till the point where borrowers deposit money in 4th national Bank  

=$1000 + $950 + $902.5 + $857.375 = $3709.875

So, the money supply in the economy increases from $1000 to $3709.875