Answer to Question #214379 in Macroeconomics for geoffrey

Question

Assets

Liabilities

Reserves                    K 1,500

Loans                       K 3,500

Initial Deposit           K 5,000

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

                  

               iv.           By how much can the bank increase its loans?

At the end of the credit creation process, what will be the final value of the deposits

Answer 1

iv) credit multiplier=$\frac{1}{reserve \space ratio}=\frac{1}{10\%}=\frac{1}{0.1}=10$

The maximum the bank can extend as loans=credit multiplier $\times$ initial deposit=$10\times 5000=K50000$

If all the loans are deposited in the banks as new deposits, then the final value of the deposits will be equal to the maximum amount of loans that can be given as loans by the bank. Thus final deposit value= K 50,000