Question

Explain how banks can increase the money supply in a fractional reserve system given an initial injection of $100 Billion USD in deposits and a required reserve ratio of 10%. Explain in paragraph form.

Answer 1

Fraction reserve system:

Under it, banks keep some of the money as reserves which are decided by the central bank of the country. The remaining balance lend to public and public pays the amount to someone, and that comes back in another checking account this process goes on up to the fraction decreases to zero.

The total amount multiple of the more multiple and the multiplier is

Multiplier =1/reserve ratio

=1/0.1

=10

the total amount after whole circulation =multiplier *initial deposit

=10*100

=1000 billion USD

the deposits changes banks and some time comes to same bank (the given table is up to 30 circulation, but it goes to USD 1000 billion some to converse)

Bank name	Initial deposit	Fraction with bank	lending
A	100	10	90
B	90	9	81
C	81	8.1	72.9
D	72.90	7.29	65.61
E	65.61	6.56	59.05
F	59.05	5.90	53.14
G	53.14	5.31	47.83
H	47.83	4.78	43.05
I	43.05	4.30	38.74
J	38.74	3.87	34.87
H	34.87	3.49	31.38
M	31.38	3.14	28.24
N	28.24	2.82	25.42
O	25.42	2.54	22.88
P	22.88	2.29	20.59
Q	20.59	2.06	18.53
R	18.53	1.85	16.68
S	16.68	1.67	15.01
T	15.01	1.50	13.51
U	13.51	1.35	12.16
X	12.16	1.22	10.94
Y	10.94	1.09	9.85
Z	9.85	0.98	8.86
AA	8.86	0.89	7.98
AB	7.98	0.80	7.18
AC	7.18	0.72	6.46
AD	6.46	0.65	5.81
AE	5.81	0.58	5.23
total	947.67