Economic long questions

2006-11-03 4:58 pm
You take $100 you had kept under your pillow and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10% of deposits, by how much does the total amount of deposits in the banking system that could result? By how much does the money supply increase?

回答 (1)

2006-11-04 5:46 am
✔ 最佳答案
If I did not misunderstand your question, you must mean the following

"How much does the money supply increase when you deposit $100 in theh banking system when the reserves requirement is 10 percent?"

When you deposit $100 in the bank, the bank will have keep $10 (10% of $100) as reserves and lend out $90 (90% of $100) to, say, to person A. For simplicity, let us assume that persona A will deposit this $90 he has just borrowed into the same bank. Then the bank will keep 10% of this $90 (i.e., $9) and will lend out the remaining 90% (i.e., $90*90%=$81) to person B. Assume this process continues indefinitely, the total amount of money generated will be $900 and if including your original $100, the banking system will have $1000 in total.

How do I come up $900? There is a formula for that, which is as follows:
original deposit *[1/(1- reserve requirement)]

In your case, the money generated by your $100 deposit is equal to the following:
100*[1/(1-0.1)]=900

Hope this helps!


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