Question

An economy has no banks. The total money supply amounts to $2000 and the people of the economy keeps away the money under their blankets. Then Kuddus Mia opens the first bank, Bank Kuddus. Following the footsteps three other bank open up, Bank Mojnu, Bank Lailee and Bank Jarina. Also, the government sets up a Central Bank accordingly and the minimum reserve ratio is set at 15%. Explain how money supply is created using T-Accounts and describing the process involving all mentioned four banks. Also, calculate the total money supply created at the end of the process (Hint: money multiplier).

Answer 1

First, I used the money multiplier formula and determined that the multiplier is $1\over 15\%$ which is $6.67$ 6Second, I used this formula -change in money supply =change in reserves ×money multplier - to calculate the maximum change in the money supply as follows: change in money supply$=2000×6.67or 13333.33$ .So, a $15\%$ reserve ratio multiplied a $2000$ deposit $6.67$ times into a $13333.33$million money supply