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Illustrate how the banks create money

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Reference no: EM13885704

Task 1 - Commercial banks in United Economy have total deposits of AED 300 billion. Their reserves are AED 15 billion, two- thirds of which are with the Central Bank as deposits. There are AED 30 billion notes outside the banks. There are no coins!

Calculate-

a) The monetary base.

b) The banks' reserve ratio.

c) Currency drain as a % of deposits.

Task 2 - Suppose Mr. Y deposits AED 100,000 into a one-year Certificate of Deposit at 5% interest. The Central Bank sets the reserve ratio for the banks at 10%.

a) Illustrate how the banks create money with the help of given information.

b) Calculate the total money creation in the economy with the help of formula.

Reference no: EM13885704

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