Suppose a typical small open economy in a developing country is characterized by: The Central Bank has set a required reserve ratio of 7.5 % for the entire banking system. There are five (5) Banks in this simple banking system, BANK A, BANK B, BANK C, BANK D and BANK E. BANK A has an initial deposit of Kshs. 20,000 and makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Kshs 2,000, which is honored. A Customer who is advanced money from Bank A keeps aside 5% of the advance for his personal use. Bank B also makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Kshs 1,430, which is honored. A Customer who is advanced money by Bank B keeps aside 10% of the advances for personal use. The government through the Central Bank injects an additional Kshs. 10,000 into the banking sector through Bank C and bank D to support the Banking Sector, so that each receives 50 percent of this injection. The Central Bank also reviews the required reserve ratio and lowers it by 20 percent. Bank C makes a provision of 5% to retain additional reserves. A customer who is holding a cash of Kshs 2000, decides not to deposit it and another customer who had deposited a cheque of Kshs 1000 with bank C has it dishonored. A Customer who is advanced money by Bank C keeps aside Kshs. 2,000 for personal use. Bank D also makes a provision to retain 10% as additional reserves. It also sets aside Kshs 3000 to pay dividends to its shareholders. A Customer who is advanced money by Bank D keeps aside 5% for his personal use. Bank E makes a provision to retain additional 10% as reserves.A customer also presents a cheque of Kshs 2,000, which is dishonored. It also sets aside Kshs 2500 to pay dividends to its shareholders Required: Identify with reason in this case seven (7) factors that would limit Credit Creation in this Banking system.

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Modern Macroeconomics And Monetary Policy

Section: Chapter Questions

Problem 7CQ

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. Suppose a typical small open economy in a developing country is characterized by:

The Central Bank has set a required reserve ratio of 7.5 % for the entire banking system.
There are five (5) Banks in this simple banking system, BANK A, BANK B, BANK C, BANK D and BANK E.
BANK A has an initial deposit of Kshs. 20,000 and makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Kshs 2,000, which is honored. A Customer who is advanced money from Bank A keeps aside 5% of the advance for his personal use.
Bank B also makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Kshs 1,430, which is honored. A Customer who is advanced money by Bank B keeps aside 10% of the advances for personal use.
The government through the Central Bank injects an additional Kshs. 10,000 into the banking sector through Bank C and bank D to support the Banking Sector, so that each receives 50 percent of this injection. The Central Bank also reviews the required reserve ratio and lowers it by 20 percent.
Bank C makes a provision of 5% to retain additional reserves. A customer who is holding a cash of Kshs 2000, decides not to deposit it and another customer who had deposited a cheque of Kshs 1000 with bank C has it dishonored. A Customer who is advanced money by Bank C keeps aside Kshs. 2,000 for personal use.
Bank D also makes a provision to retain 10% as additional reserves. It also sets aside Kshs 3000 to pay dividends to its shareholders. A Customer who is advanced money by Bank D keeps aside 5% for his personal use.
Bank E makes a provision to retain additional 10% as reserves.A customer also presents a cheque of Kshs 2,000, which is dishonored. It also sets aside Kshs 2500 to pay dividends to its shareholders

Required:

Identify with reason in this case seven (7) factors that would limit Credit Creation in this Banking system.

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