ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Please xplain why the answer is this:
a) 0.1 * 1000 = 100
b) 1000-100 = 900
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
a) 0.1 * 1000 = 100
b) 1000-100 = 900
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
Transcribed Image Text:Given the balance sheet of BSP Bank as follows:
Liabilities
Deposits 30000
Assets
Reserves 25000
Loans 5000
Given that the reserve-deposit ratio is 10% and you decide to deposit 1000 into BSP Bank.
a) Solve for the change in reserves:
b) Solve for the change in loans:
c) Solve for the overall change in money supply:
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The final answer should have been 9000 as:
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
Why is this so?
Solution
by Bartleby Expert
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question
The final answer should have been 9000 as:
c) Let CU be currency in circulation
Old MS = CU + R*[1/reserve deposit ratio] = CU + existing created deposits = CU + 30000
New MS after deposit = [CU – 1000] + [existing created deposits] + [newly created deposits]
= [CU -1000] + [30000] + [1000*1/0.1]
Difference = -1000 + [1000/0.1] = 9000
Why is this so?
Solution
by Bartleby Expert
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- Bank credit creation is seen by Werner as a reason for the Japanese economic boom in the 80’s and subsequent collapse in the 90’s, and generally boom bust cycles occur, because, (a) Banks were merely intermediaries, taking deposits and giving loans, causing the rise and fall. (b) “Good” debt from asset lending allowed banks to lend to the real sector increasing nominal GDP, when asset prices fell, the “bad” debt caused banks to withdraw credit to the real sector causing a recession. (c) Banks lent heavily to assets, causing asset prices to rise and then withdrew credit from assets causing a collapse (d) Both (b) and (c) (e) All of the abovearrow_forwardI need help soon as possiblearrow_forward
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