Question

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

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

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.

Rahul Sunny answered 1 year ago

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