I do not want to get any pic, i want to copy the answer. There is a one-seventh

Question

I do not want to get any pic, i want to copy the answer.

There is a one-seventh (1/7) reserve requirement. If the fed wants to create money they first buy a $1,400,000 bond from a bank (Bank A). Bank A's reserves increase and its holding of bonds decreases. But Bank A does not want unproductive assets so they loan the money to a home buyer. The home buyer pays the builder who deposits the money into an account at Bank B. Bank B uses the new deposits to make an auto loan to a company. They lend the most that they have legally available. How much money did then lend?

Explanation / Answer

As, rr =1/7

Original deposit = 140000

Bank A's lending =(1-rr)*original deposit = (1-1/7)*140000 = 120000

Bank B's lending =(1-rr)2*original deposit = (1-1/7)2*140000= 102857.14

Bank C's lending = (1-rr)3*original deposit =(1-1/7)3*140000= 88163.265

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so total money supply =[1+(1-rr)+(1-rr)2+(1-rr)3...........]*original deposit

= (1/rr)*original deposit = (1/1/7)*140000 = 7*140000 = 980000.

Hope This Helps.

Feel Free To Comment In Case Of Any Query.

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