Question

While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves:

Answer 1

Answer and Explanation:

The computation is shown below:

a. The lending amount is

= $100 - $100 × 5%

= $100 - $5

= $95

b. The money in case of the change in the economy is

= Bill amount + lending amount

= $100 + $95

= $195

c. The money mutiplier is

= 1 ÷ required reserve ratio

= 1 ÷ 0.05

= 20

d. The money created is

= bill amount × money multiplier

= $100 × 20

= $2,000