Money creation process, Microeconomics

Assignment Help:

The Money Creation Process is explained below:

We can now study the money supply or the creation process. Suppose the government wishes to buy pencils worth Rs. 10 for the officials working for it. The supplier firm is called S and has the deposit account with Bank A. In order to buy the pencil, the government asks the central bank to print the 10 rupee note and give it to government.5 this action makes M0 to expand by Rs. 10. Now the government gives this amount to S (in exchange for the pencils) who in turn deposits the sum of money into his account in Bank A. What is the work of A? Assuming it operates the safety cushion or reserve ratio of 10%, A will add Re 1 to its liquidity reserve and then lend Rs 9 to the firm T. Firm T, takes the Rs 9 and deposits it in an another Bank B. B acts in the similar way: it adds 90 paisa (10% of Rs 9) to its existing liquidity reserve and lends the remaining amount which is Rs 8.1 to firm Z. The process goes carries on, the amount lent falling every time by the factor of 10%.

If the money creation process is made as an infinite series (starting from central bank printing   ten   rupee   note),   we   will   get   10   +   10*(90%)   +   10*(90%)*(90%)  + 10*(90%)*(90%)*(90%) + ……. which is an infinite converging series with the first term of 10 and a convergence factor of 0.9 (or 90%). The sum till infinity of this series is 10/(1-0.9) = 100. Therefore, an initial M0 expansion of Rs. 10 has a entire money supply (or M2) impact of Rs 100, thanks to the intermediation of the commercial banks. There is a money multiplier (MM) at action of magnitude 10.


Related Discussions:- Money creation process

Assignment, In the table below are given the output (X), T.C., and Price fo...

In the table below are given the output (X), T.C., and Price for a firm. Complete the following table, and then answer the questions at the bottom of the table.   X T.C P=A.R

Illustrate the economic growth, Illustrate the Economic Growth Up until...

Illustrate the Economic Growth Up until 1800 growth rates of human populations were glacial. Population growth between 5000 B.C. and 1800 averaged less than one-tenth of a perc

Gdp growth, GDP Growth, Employment and Poverty: The advocates of econo...

GDP Growth, Employment and Poverty: The advocates of economic reforms point out that the reform process has the potential of accelerating economic growth. After the teething t

Periodic table, which three group of the periodic table contain the most el...

which three group of the periodic table contain the most elements classified as metalloids (semimetals)?

Use arc elasticity to find the price elasticity of demand, Elasticity- a...

Elasticity- a) The price of good X goes up by 2.75%, the quantity demanded of good Y goes from 10,500 units to 25,000.  What is the Exy?  What does that number mean?  What is th

Is the natural rate of unemployment includes frictional, Is the natural rat...

Is the natural rate of unemployment includes frictional, structural & seasonal unemployment?  The natural rate of unemployment contains frictional, structural & seasonal unempl

Help, In a competitive market, the market demand is Qd = 150 - 5P and the m...

In a competitive market, the market demand is Qd = 150 - 5P and the market supply is Qs = 5P - 10. As a result of a price ceiling imposed at $14, the new consumer surplus and produ

Welfare analysis, Welfare Analysis 1-Of the following four institution...

Welfare Analysis 1-Of the following four institutions for allocating apartment to different people at different prices   i.  The competitive market  ii.  A discriminatin

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd