Most people in the country of Classica tend to keep $3 out of every $100 of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 4% of all bank deposits as reserves. Calculate the extended money multiplier Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation. In which situation can the simple money multiplier value equal that of the extended money multiplier value? Justify your answer with a numerical example.
Most people in the country of Classica tend to keep $3 out of every $100 of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 4% of all bank deposits as reserves. Calculate the extended money multiplier Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation. In which situation can the simple money multiplier value equal that of the extended money multiplier value? Justify your answer with a numerical example.
Chapter19: Money Creation
Section: Chapter Questions
Problem 15SQ
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- Most people in the country of Classica tend to keep $3 out of every $100 of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 4% of all bank deposits as reserves.
- Calculate the extended money multiplier
- Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation.
In which situation can the simple money multiplier value equal that of the extended money multiplier value? Justify your answer with a numerical example.
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