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The total money supply in an economy is $2000 and all of it is in cash...

The total money supply in an economy is $2000 and all of it is in cash form. Then the first bank opens up (give it any name you like) and the people of the economy go on to deposit $ 200 into that bank. Incidentally, two other banks open up ( give them any names you like) and the government then sets up the first Central Bank, which immediately sets down a Reserve Ratio of 20%. With detailed T-Accounts of the three (3) banks explain the procedures through which the banking system creates money in the economy. Explain all the steps.                                            

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Expert Solution

The money is the economy is created through the systmes of the banks operating, the process is called CREDIT CREATION. The amount of money being created in explaine through the concept of MONEY MULTIPLIER. Go through the following process as explain below for the example given above.  

Rahul Sunny answered 1 year ago
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