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AlexFokin [52]
3 years ago
10

Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve rat

io = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of currency into checking accounts will create excess reserves of
Business
1 answer:
Vlada [557]3 years ago
3 0

Answer:

The bank will create excess reserve of $200 billion

Explanation:

The question measures the size of credit expansion associated with the new currency deposit. the computation below shows how excess reserves can be computed.

Money multiplier              =   1 /Legal Reserve Ratio  = 1/0.2 = 5

Excess Reserve Created = A x (1 /Legal Reserve Ratio)

Where:                          A  = New currency deposit =  $40

       Legal Reserve Ratio = 0.20      

                                     

Excess Reserve Created = $40 x (1/0.2)  =  $40 x 5 =  $200 billion                                          

The legal reserve of 5 indicates that for every unit of money reserved by banks, they are able to create 5 units of same.

The money creation capability of the banking system as a whole is depends on the legal reserve ratio. Legal reserve ratio is a fraction of a bank deposit which the law requires them to hold. The bank can only lend the balance after deducting the legal reserve.

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3 years ago
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D.

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2 years ago
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Vivian worked as a manager at her company. She was asked to order a few cars that would be used by company employees. Which best
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3 years ago
Profit Inc., a manufacturing firm, has purchased raw materials worth $10,000 on credit from its vendors. The business plans to s
andrezito [222]

Profit Inc., a manufacturing firm, has purchased raw materials worth $10,000 on credit from its vendors. The business plans to settle the vendor’s full payment after two months. Under "current liabilities"section of balance sheet this account will be recorded as "account payable".

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<u>Explanation:</u>

Raw material purchased on credit from a vendor is a liability and it is shown under current liabilities in "accounts payable". Since raw material purchased on credit and payment is to be made after two months.

Payment due gives rise to liability. Now current liability is a company's short term obligations that are to be paid back within a year. Here the firm will have to make payment within two months to the vendor.

8 0
3 years ago
Read 2 more answers
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