Suppose there is only one bank in the economy, Happy Bank. The citizens in this economy...

Suppose there is only one bank in the economy, Happy Bank. The citizens in this economy have 20 million in money, and they have all deposited their money in Happy bank.

a. happy bank decides on a policy of holding 100% reserves. draw a T-account for the bank.

b. Now, happy bank is required to hold 5% of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after this first round of loans has been made.

c. Assume that Happy Bank is part of a multi-bank system. How much is the amount of money created through the multiple expansion of credit? How much is the total money supply in this economy?

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Expert Solution

Rahul Sunny answered 1 year ago

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