Assuming that banks choose to maintain a liquidity ratio of 20 per cent and assu
ID: 1213562 • Letter: A
Question
Assuming that banks choose to maintain a liquidity ratio of 20 per cent and assuming that new cash deposits of £100m are made in the banking system:
(a) Complete the following table which shows how credit is created.
Total deposits afters five rounds
(b) How much credit will have been created after five rounds?
(c) To what level will total deposits eventually increase?
(d) Define the bank multiplier
(e) What is the bank multiplier in this case?
(f) How is it related to the liquidity ratio?
in million in million Banks receive 100 Hold 20 Lend 80 Second round deposits rise by ……. Hold …… Lend ……. Third round deposits rise by ……. Hold …… Lend ……. Fourth round deposits rise by ……. Hold …… Lend ……. Fifth round deposits rise by ……. Hold …… Lend …….Total deposits afters five rounds
(b) How much credit will have been created after five rounds?
(c) To what level will total deposits eventually increase?
(d) Define the bank multiplier
(e) What is the bank multiplier in this case?
(f) How is it related to the liquidity ratio?
Explanation / Answer
Total deposits afters five rounds-- 500 millions
(b) How much credit will have been created after five rounds? 20+40+80+160+240 -540.
(c) To what level will total deposits eventually increase-- 500 millions
(d) Define the bank multiplier-
What is the 'Multiplier Effect'
The multiplier effect is the expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.
Total deposits afters five rounds-- 500 millions
(b) How much credit will have been created after five rounds? 20+40+80+160+240 -540.
(c) To what level will total deposits eventually increase-- 500 millions
(d) Define the bank multiplier-
What is the 'Multiplier Effect'
The multiplier effect is the expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.