Question

How much potential money could be created from a new deposit of $2,000 and with a reserve ratio of 10%? How would it affect the ability of bank to create money if the reserve ratio decreased to 5%?

Answer 1

Answer:

To calculate the effect of the bank's ability to create money with a decrease in reserve ratio.

Given:

New deposits= $2000, Reserve ratio= 10 percent

To calculate the money multiplier= 1/10%= 1/0.1= 10

To calculate the money that was created we multiply the multiplier by the new deposits.

Therefore: 10*2000= $20,000

To calculate the amount created when the reserve ratio is 5%

To calculate the money multiplier= 1/5%= 1/0.05= 20

Therefore the money created will be 20*2000= $40,000

Based on $20000 extra gained, a decrease in the reserve ratio to 5% will lead to an increase in the capacity f the bank to make more money.

Explanation:

To calculate the effect of the bank's ability to create money with a decrease in reserve ratio.

Given:

New deposits= $2000, Reserve ratio= 10 percent

To calculate the money multiplier= 1/10%= 1/0.1= 10

To calculate the money that was created we multiply the multiplier by the new deposits.

Therefore: 10*2000= $20,000

To calculate the amount created when the reserve ratio is 5%

To calculate the money multiplier= 1/5%= 1/0.05= 20

Therefore the money created will be 20*2000= $40,000

Based on $20000 extra gained, a decrease in the reserve ratio to 5% will lead to an increase in the capacity f the bank to make more money.