This problem illustrates how banks create credit and can thereby lend out more m

Question

This problem illustrates how banks create credit and can thereby lend out more money than has been deposited. Suppose that $100 is deposited in a bank. Experience has shown bankers that on average, only 8% of the money deposited is withdrawn by the owner at any time. Consequently, bankers feel free to lend out 92% of their deposits. Thus $92 of the original $100 is loaned out to other customers (to start a business for example). This $92 will become someone else's income and, sooner or later, will be re-deposited in the bank. Then, 92% of $92 or $92(0.92) = $84.64, is loaned out and eventually re-deposited. Of the $84.64, the bank again loans out 92%, and so on. a) Find the total amount of money deposited in the bank as a result of these transactions. b) The total amount of money deposited divided by the original deposit is called the credit multiplier. Calculate the credit multiplier for this example and explain what this number tells us.

Explanation / Answer

Solution: a. Total amount of money deposited Number Amount 1.) $100 2.) $100 × 92% = $92 3.) $92 × 92% = $84.64 4.) $84.64 × 92% = $77.87 5.) $77.87 × 92% = $71.64 6.) $71.64 × 92% = $65.91 7.) $65.91 × 92% = $60.64 8.) $60.64 × 92% = $55.79 9.) $55.79 × 92% = $51.33 10.) $51.33 x 92%. = $47.22 11.) $47.22 x 92% = 43.44 12.) $43.44 x 92% = $39.96 13.) $39.96 x 92% = 36.76 14.) $33.82 x 92% = 31.11 15.) $31.11 x 92% = 28.62 16.) $28.62 x 92% = 26.33 17.) $26.33 x 92% = $ 24.22 18.) $ 24.22 x 92% = 22.28 19.) $22.28 x 92% = 20.50 20.) $20.50 x 92% = 18.86 21.) $18.86 x 92% = 17.35 22.) $17.35 x 92% = $15.96 23.) $15.96 x 92% = 14.68 24.) $14.68 x 92% = $13.51 25.) $13.51 x 92% = 12.43

$12.43 x 92% = 11.44

$11.44 x 92% = $10.52

$10.52 x 92% = $9.68

$9.68 x 92% = $8.91

$8.91 x 92% = $8.19

$8.19 x 92% = $7.53

$7.53 x 92% = $6.93

$6.93 x 92% = $6.37

$6.37 x 92% = $5.86

$5.86 x 92% = $5.39

$5.39 x 92% = $4.96

$4.96 x 92% = $4.56

$4.56 x 92% =4.20

$4.20 x 92% = $3.86

$3.86 x92% = $3.55

$3.55 &x 92% = $3.27

$3.27 x 92% = $3.00

$3.00 x 92% = $2.76

$2.76 x 92% = $2.54

$2.54 x92% = $2.33

$2.33 x92% = $2.14

similarly upto 1.012 Which add upto 1237.85

(b)1250/100 = 12.50 = credit multiplier.

This states that bank generates 12.50dollar from 100 dollars.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.