Reference no: EM132607304
Question - Answer the following questions:
1. Explain how a bank can create money by making loans by going through the following steps..
Make up an example of a fictitious bank (call it Bank A) with a certain amount of assets and liabilities (just make up a big number and make sure they balance.)
How much is the money supply?
With a reserve requirement of 20%, how much can this bank loan out?
Make a loan and show the new balance sheet before the loan is spent.
Show the change in the balance sheet of a second bank (Bank B) after the loan is spent and deposited in Bank B.
What happens to the balance sheet of Bank A?
Counting Banks A and B what is now the total money supply?
With a reserve requirement of 20%, how much can this bank loan out?
Show the balance sheet of a third bank (Bank C) after that loan is deposited into it.
What is the total money supply now, counting the money in Banks A, B, and C?
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