In: Economics
Bank 1 received a deposit of SR1 million. Assuming that the banks retain no excess reserves, answer the following questions:
The reserve requirement is 25 percent.
Fill in the blanks in the table below.
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 |
Now the reserve requirement is 5 percent.
Fill in the blanks in the similar table.
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 |
(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.