Econ credit creation past paper (15points)

2008-04-09 7:10 pm

This is from 2000 10ai and ii)
The balance sheet of the banking system of Economy A is shown below. Suppose all banks do not hold excess reserve and the public hold $50mn cash in hand.
Assets($mn) Liabilities($mn)
Cash reserve 200 Deposits 1000
Loans 800

a) Suppose the public now withdraw $10 million cash from the banks
(i) Calculate the change in total deposits of the banking system.
(ii) Calculate with explanation the change in money supply

The answer for (aii) is -$40mn
I just don't understand why it is -$40mn even if I have already read the explanation from the solution.
Can anyone please explain it briefly to me?
Please don't just copy the solution from JOINT-US, Thanks a lot!

更新1:

yes! I understand it now! I'll choose u to be the best answer later can u please answer my other question that I've just posted? thz~u really helped me

回答 (1)

Gabriella Montez

2008-04-09 7:59 pm

✔ 最佳答案

I think I may help you. I'll try my very best.
ai) rrr = ( 200 / 1000 ) x 100% = 20%
Suppose the public now withdraw $10 million cash from the banks, then deposits become: $1000mn - $10mn = $990mn
Reserves become: $200mn - $10mn = $190mn
However, required reserves = $990mn x 20% = $198mn
Thus reserves fall short of: $198mn - $190mn = $8mn
The change in total deposits of the banking system:
( - $8mn )( 1 / 20% ) = - $40mn
But there is an initial withdrawal of $10mn and thus changes in total deposits = - $40mn - $10mn = -$50mn
ii) For b, I think the problem comes from [ money supply ].
Ms = Cp + Dd
Cp is initially $50mn but now there is a withdrawal of $10mn and thus Cp increases by $10mn.
From ai), Dd decreases by $50mn.
Thus,
Change in Ms = + $10mn - $50mn = - $40mn

2008-04-09 12:03:22 補充：
Please specify which part you still don't understand so that I can help you.

參考: My Econ Knowledge

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