2. Consider a new deposit to the Canadian banking system of $10,000. Suppose that all commercial banks have a target reserve ratio of 20% and there is no cash drain. The following table shows how deposits, reserves, and loans change as the new deposit permits the banks to "create" money. Round. A Deposits A Reserves A Loans $10,000 $2,000 $8,000 2nd 3rd The first round has been completed in the table. Now, recalling that the new loans in the first round become the new deposits in the second round, complete the second round in the table. Then by using the same approach, complete the entire table. a. b. This deposit-creation process could go on forever, but it would still have a finite sum. 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? c. What is the eventual total change in reserves? (1) What is the eventual change in loans?
2. Consider a new deposit to the Canadian banking system of $10,000. Suppose that all commercial banks have a target reserve ratio of 20% and there is no cash drain. The following table shows how deposits, reserves, and loans change as the new deposit permits the banks to "create" money. Round. A Deposits A Reserves A Loans $10,000 $2,000 $8,000 2nd 3rd The first round has been completed in the table. Now, recalling that the new loans in the first round become the new deposits in the second round, complete the second round in the table. Then by using the same approach, complete the entire table. a. b. This deposit-creation process could go on forever, but it would still have a finite sum. 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? c. What is the eventual total change in reserves? (1) What is the eventual change in loans?
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:4:43
2. Consider a new deposit to the Canadian banking system of $10,000. Suppose that all commercial
banks have a target reserve ratio of 20% and there is no cash drain. The following table shows
how deposits, reserves, and loans change as the new deposit permits the banks to "create" money.
Round.
A Deposits
A Reserves
A Loans
$10,000
$2,000
$8,000
2nd
3rd
4th
5th
The first round has been completed in the table. Now, recalling that the new loans in the
first round become the new deposits in the second round, complete the second round in
the table. Then by using the same approach, complete the entire table.
a.
b. This deposit-creation process could go on forever, but it would still have a finite sum.
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?
с.
What is the eventual total change in reserves? (1) What is the eventual change in loans?
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