and Im s, Check for ASSIGNMENT 8 Answers to this assignment are due back by Wedn
ID: 1108022 • Letter: A
Question
and Im s, Check for ASSIGNMENT 8 Answers to this assignment are due back by Wednesday, November 15, 2ox7. Please feel free to work on the answers in groups of not more than three, and to hand in joint work The Fed injects an extra s6,000 into the economy, by buying some bonds from you that you no longer want to hold. You deposit all of this cash into your bank account. The banks have a required reserve ratio of 12%, and do not exceed this level. a. On a series of balance sheets (i.e. showing bank assets, and liabilities and net worth), trace through the first three rounds of transactions. Assume that when the bank lends money, all of this money is deposited back into the banking system. b. In a, after three rounds, how much additional money is there in the economy (including the initial injection of s6,o00)? c. In a, after all rounds, how much additional money will have been created? d. In a., what is the value of the "money multiplier"? e. Now repeat a., but assume that only 80% of the value of the bank loans is redeposited in the banking system (i.e. there is cash drainage). f. In e., after three rounds, how much additional money is there in the economy? g. In e., after all rounds, how much additional money will have been created? [Hard.) h. In e., what is the value of the money multiplier? [Follows straightforwardly from g-] 2. More on Money Creation Indicate which of the following statements are true and which are false; if false, explain why If the reserve ratio of a bank falls below the level required by the Fed, it may borrow cash from the Fedat the reianing discount rate. a. e and billal from the public by the Fed will begin aExplanation / Answer
Answer (a)
$ 6000 is deposited in the bank. The reserve ratio is 12%
Therefore, the loaned amount = 6000- 0.12x6000
= 6000- 720
= $5280
Answer (b)
After three rounds how much additional money is there including the initial injection of $6000.
In the first round, additional money created is $5280
This money further goes transformation as
additional money created = 5280 - 0.12x5280
= 5280 - 633.6
= $4646.4
After Third Round, money created = 4646.4 - 0.12x4646.4
= 4646.4 -557.568
=4088.832
Hence, money created after three round = 5280 + 4646.4 + 4088.832
= $14015.23
Hence Money with intitial nclusion = $6000 + $14015.23
= $20015.23
Answer (c)
After all rounds = money injectedx money multiplier
= $6000 x (1/reserve ratio)
= $6000 x (1/ 0.12)
= $6000x 8.3333333333
= $50000
Answer (d)
Value of Money Multiplier = 1/reserve ratio
= 1/0.12 = 8.3333333333
= 8.34 approx
Answer (e)
Since, only 80 % is deposited in the bank. Hence, money injected = 6000x0.8 = $4800
As above we can have different rounds and calculate the money created considering the reserve ratio as 12 %.
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