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In: Economics

Use the following assumptions for this question. The commercial banking system has a target reserve ratio...

Use the following assumptions for this question. The commercial banking system has a target reserve ratio of 5% and there is no cash drain. A new immigrant to the country makes a cash deposit of $1,000. In the following table show how deposits, reserves, and loans change as the new deposit permits the banks to “create” money.

Round

Δ Deposits

Δ Reserves

Δ Loans

First

Second

Third

Fourth

Fifth
  1. A) Complete the entire table.
  2. B) You have now completed the first five rounds of the deposit-creation process. What is the total change in deposits so far as a result of the single new deposit of $1000?
  3. C) This deposit-creation process will go on forever, but it will have a finite sum. In the text, we showed that the eventual total change in deposits is equal to 1/v times the new deposit, where v is the target reserve ratio. What is the eventual total change in deposits in this case?
  4. D) What is the eventual total change in reserves? What is the eventual change in loans?

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
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