How much will be created in the form of deposits and loans

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Suppose that the public wishes to hold $0.25 in pocket money (currency and coin) and $0.20 in time and savings deposits. Suppose that banks wish to hold $0.15 for each new dollar of transaction money received. Suppose that $0.08 finds its way outside the domestic banking system. Suppose the reserve requirement on transaction deposits is 10 percent and that on time and savings deposits is 4%. Show your work below.

Problem a. What is the size of the deposit multiplier?

Problem b. Suppose $5 million in new excess reserves appear in the banking system. How much will be created in the form of deposits and loans?

Problem c. By how much did the leakages of funds from the banking system reduce the size of the transaction deposit multiplier? (Hint: compute the simple transaction deposit multiplier).

Reference no: EM132813162

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