Macroeconomics

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jvaguebc38

Business Finance

Description

Directions

Instead of a discussion board, this week you will submit an individual written assignment that illustrates the role commercial banks play in the creation of money. Assume that, initially, the central bank of an economy puts $5,000 into circulation and commercial banks want to hold reserves of 20 percent of deposits. Further assume that the public holds no currency. Show and discuss the consolidated balance sheets of the economy’s commercial banks for each of the following instances.

  1. After initial deposits (compare to Table 9.2 in your textbook)
  2. After one round of loans (compare to Table 9.3 in your textbook)
  3. After the first redeposit of dollars (compare to Table 9.4 in your textbook)
  4. After two rounds of loans and redeposits (compare to Table 9.5 in your textbook)
  5. What are the final values of bank reserves, loans, deposits, and the money supply (compare to Table 9.6 in your textbook)?
Response Parameters
  • typed, double spaced, and use 12-point font, thesis, conclusion

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Explanation & Answer

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Surname 1
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Explanation
1. The currency and the initial deposits in the economy will increase by $5000 since the
injection of the money to the economy will force the citizens to deposit money to
commercial banks.
2. The bank will, therefore, keep the 20%of the deposits as reserves which mean that the
remaining 80%, i.e., $4,000 will be available for lending.
3. It is common that people do not save money but spend them which means that the money
lent out will be deposited back to the banks increase the number of deposits from $5,000
to $9,000. The balance sheet of the bank will result in an increase in reserves to $9,000.
4. The bank will, in turn, lend 80% of the deposits, i.e., $9,000 to the public while the
reserves will be maintained at $5,000. The money lends to the public will be $7,200
making the total dep...

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