Question

Gail Nelson begins her first job after graduating from college and starts putting money away in a savings account. She believes she has removed this money from the circular flow between buyers and sellers that she studied in Introduction to Business. Is Gail correct?

Answer 1

Answer:

Gail is not correct, since bans have their own way of creating money and expanding the money supply.

To calculate the total effect of a deposit in a savings account, you must multiply the deposit times the money multiplier (1/reserve rate). This happens because the banks receives $100, and it later will lend $100 - reserve rate to another customer, who in turn will spend that part of the money and deposit the rest. At the same time the bank will again lend the money deposited by the borrower to another borrower, and this operation repeats itself.