3. In the country of SpringNow, the public is holding a total of $5,000. Total l

Question

3. In the country of SpringNow, the public is holding a total of $5,000. Total lending in the banking sector, which has 10 identical banks, is S76,000. The currency deposit ratio is 5% and the reserve requirement is 15%. The banks may hold excess reserves. (a) Describe the balance sheet for one of the 10 banks. (b) How much reserves do the banks hold as a fraction of total deposits? (c) How large is the money supply in this economy? (d) What is the money multiplier in this economy? (e) How would a $8,000 open market sale of bonds by Spring Now central bank change total reserves and money supply in SpringNow? Assume that all the banks behave identically

Explanation / Answer

The simple transaction between the customer and the restaurant was therefore the outcome of

many economic choices. You can see other examples of economics as you look around you—

for example, you might know that the workers earn relatively low wages; indeed, they may

very well be earning minimum wage. Across the street, however, you see a very different kind

of establishment: a fancy restaurant. The chef there is also preparing food for customers, but

he undoubtedly earns a much higher wage than KFC cooks.

Before studying economics, you would have found it hard to explain why two cooks should

earn such different amounts. Now you notice that most of the workers at KFC are young—

possibly students trying to earn a few euros a month to help support them through college.

They do not have years of experience, and they have not spent years studying the art of

cooking. The chef across the street, however, has chosen to invest years of his life training and

acquiring specialized skills and, as a result, earns a much higher wage.

The well-heeled customers leaving that restaurant are likewise much richer than those around

you at KFC. You could probably eat for a week at KFC for the price of one meal at that

restaurant. Again, you used to be puzzled about why there are such disparities of income and

wealth in society—why some people can afford to pay €200 for one meal while others can

barely afford the prices at KFC. Your study of economics has revealed that there are many

causes: some people are rich because, like the skilled chef, they have abilities, education, and

experience that allow them to command high wages. Others are rich because of luck, such as

those born of wealthy parents.

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