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beks73 [17]
3 years ago
6

Suppose the Fed decides to increase the money supply. It purchases a government bond worth $2,000 from Antonia, a private citize

n. Antonia deposits the check in her account at First National Bank. Supposed the required reserve ratio is 0.2 (20%).
(a) Trace the effect of this change through three banks- First National, Second Federal, and Third State.
(b) How much money will be generated in this banking system?
Business
1 answer:
Ivanshal [37]3 years ago
6 0

Answer:

(a) Trace the effect of this change through three banks- First National, Second Federal, and Third State.

Antonia deposits $2,000 in First National Bank.

Then First national Bank lends $1,600 to client X that uses the money to purchase something. The seller of that something deposits the money In Second Federal Bank.

Second Federal Bank then lends $1,280 to client Y that decides to use that money to pay his rent. Client Y's landlord then deposits the money in Third State Bank.

Third State Bank will then lend $1,024 to client Z...

(b) How much money will be generated in this banking system?

total money generated in the banking system = Antonia's deposit x money multiplier

money multiplier = 1 / required reserve rate = 1 / 0.2 = 5

so the total money generated = $2,000 x 5 = $10,000

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The economic order quantity is

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where,

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= Annual demand ÷ Economic order quantity × ordering cost per order + Economic order quantity ÷ 2 × carrying cost per unit

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= $742.02 + $740.52

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