Answer to Question #240960 in Macroeconomics for GabrielIe

Question

i. What is money?
ii. In commercial bank money creation process, what is cash reserve?
If GHC10,000 is deposited in a commercial bank and the cash reserve ratio is 10% of deposits,
iii. How much money can the bank create?
iv. What is the difference in the amount of money created if the cash reserve ratio changes from 10% to 5%?
v. What is the level of the money multiplier?

Answer 1

Solution:

i.). Money is a medium of exchange in the form of coins, banknotes, and cheques. Money can also be anything that is widely accepted as payment for goods and services.

 

ii.). Commercial banks create money through accepting customer deposits, providing and earning interest from loans hence improving the flow of money in an economy.

 

iii.). Banks especially big banks can create up to times the amount of real government-created money ranging from $50 billion to $100 billion per year.

 

iv.). If the cash reserve ratio is reduced by 5%, this will lower the amount of cash that banks are required to hold in reserves by 5%, permitting them to make more loans to consumers and companies. Therefore, the banks will be able to create more money through the issue of loans and earning interest from them.

 

iv.). The level of the money multiplier is the reciprocal of the reserve ratio. It refers to the maximum limit to which money supply can be affected by enhancing changes in the money deposited by the people.