Microsoft Word – Final Exam BUS500B.docx
An immigrant arrive in New Transylvania with $1,200. The $1,200
is deposited in a bank. All the banks in New Transylvania have a
required reserve ratio of 20%.
a. What is the initial increase in the bank deposits when the
immigrant arrives?
b. Now the lending-borrowing transactions are taking place and the
funds lent out are returned to the banking system in the form of
deposits. By how much has the bank deposits increased after the
banks have made 2 loans? (Hints: show how banks create money
and show how much bank A lends money to bank B and how much
bank B lend money to bank C)
c. What is the total increase in the quantity of money (bank deposits)
in the economy?
(Hints: the change in money supply = the change in monetary base
* money multiplier)
