Question

Assets

Liabilities

Reserves                    $ 1,500

Loans                       $ 3,500

Initial Deposit           $ 5,000

Assume required reserve ratio is 10 percent and that 100% of all the loans are deposited as new deposits.

                 

               ii.           Calculate the deposit and credit multiplier.

              

                

Answer 1

Given,

Initial deposits = $5000

Required reserve ratio = 10 percent

 

Required reserve ratio is the part of the total deposit that the bank has to always keep with themselves. They cannot lend that money.

Therefore required reserve would be = 10% of 5000

                required reserve$= \frac{10}{100} \times 5000$

                required reserve = 500

The bank could lend = $4500

Total deposits now would be$= 5000 + 4500$

                        $= \$9500$

Credit multiplier is calculated using the following formula:

Credit multiplier = Change in deposits$\div$ Change in reserve

Credit multiplier$= \frac{4500}{500}$

Credit multiplier = 9