Question

In: Economics

Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves, answer the following questions:

Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves, answer the following questions: 

  1. The reserve requirement is 25 percent.

  1. Fill in the blanks in the table below.

  2. What is the deposit multiplier?

Multiple Deposit Creation

Round

Deposits

Reserves

Loans

Bank 1

Bank2

Bank3

Bank 4

Bank5

All other banks

Totals

SR1, 000,000

SR

SR

  1. Now the reserve requirement is 5 percent.

  1. Fill in the blanks in the similar table.

  2. What is the deposit multiplier?


Multiple Deposit Creation

Round

Deposits

Reserves

Loans

Bank 1

Bank2

Bank3

Bank 4

Bank5

All other banks

Totals

SR1, 000,000

SR

SR

Solutions

Expert Solution

(i) Deposit multiplier is the number of times at which credit is created in the economy.

Deposit multiplier = 1/ (Required reserve ratio)

= 1/25%

= 4 times

Round Deposits Reserves Loans
Bank 1 SR 1000000 250000 750000
Bank 2 750000 187500 562500
Bank 3 562500 140625 421875
Bank 4 421875 105468.75 316406.25
Bank 5 316406 79101.56 237304.5
Total 4,000,000 1,000,000 3,000,000

(ii) if the reserve requirement is 5%

Multiplier = 1/5%

= 20 times

Rounds Deposits Reserves Loans
Bank 1 SR 1,000,000 SR 50000 SR 950000
Bank 2 950000 47500 902500
Bank 3 902500 45125 857375
Bank 4 857375 42868.75 814506.25
Bank 5 814507.25 40725.31 773781

All other bank

( further 16 times)

Total

15475617.75

20,000,000

773780.94

1000000

14701837.75

19000000

This the credit creation process.


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