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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 16, Problem 6QR
Textbook Problem
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Why don’t banks hold 100-percent reserves? How is the amount of reserves banks hold related to the amount of money the banking system creates?

To determine
Why banks don’t hold 100 percent reserves and how the reserves are related to the money that the bank creates.

Explanation of Solution

The banks are the financial institutions that accept deposits from the general public and use these deposits to provide loans to the general public. Thus, the banks accept deposits and use these deposits to create new supply of money in the economy. The reserve requirement is the portion of the deposit that the banks have to keep with them without providing loans. The reserve requirement is determined by the Fed, which is the apex authority of the banks, and they have to follow the rule.

However, the banks do not keep 100 percent reserves because then the banking will not be profitable. The banks have to provide interest to the depositors and the interest received from the loan borrowers is the main source of income of the bank...

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