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

Public holding is $5000

Lending by banks is $76000

Total currency in the system= ($5000+$76000)= $81000

Currency deposit ratio is 5%, hence,

currency / deposit=0.05

or, $81000/deposit= 0.05

or, deposit with multiple contribution= $16,20,000

Lending by banks is $76000 but reserve requirement is 15%,

hence total initial deposit= $76000/(1-0.15)=$ 89411.8

Money Multiplier for the economy= Total initial deposit/ deposit with multiple contribution=1620000/89411.8 = 18.12

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