Given the balance sheet of BSP Bank as follows: Liabilities Deposits 30000 Assets Reserves 25000 Loans 5000 Given that the reserve-deposit ratio is 10% and you decide to deposit 1000 into BSP Bank. a) Solve for the change in reserves: b) Solve for the change in loans: c) Solve for the overall change in money supply:
Please xplain why the answer is this:
a) 0.1 * 1000 = 100
b) 1000-100 = 900
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
a) 0.1 * 1000 = 100
b) 1000-100 = 900
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
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The final answer should have been 9000 as:
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
Why is this so?
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