Answer to Question #88529 in Macroeconomics for Muhammad Shariq Siddiqui

Question

. Imagine that the banking system receives additional
deposits of £100 million and that all the individual
banks wish to retain their current liquidity ratio of
20 per cent.
(a) How much will banks choose to lend out initially?
(b) What will happen to banks’ deposits when the money
that is lent out is spent and the recipients of it
deposit it in their bank accounts?
(c) How much of these latest deposits will be lent out by
the banks?
(d) By how much will total deposits (liabilities)
eventually have risen, assuming that none of the
additional liquidity is held outside the banking
sector?
(e) What is the size of the deposits multiplier?

Answer 1

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