Question

Am I solving correctly ?

Q3) First National bank (FNB) holds $120,000 million in deposits and maintains a reserve ratio of 3 percent.

1. Create a T-account for FNB

Deposits = 120,000 million

R= 3% of 120,000 million= 3600 million (120,000*3/100)

Loans= 120,000- 3600 = 116,400 million.

2. Calculate money supply?

Money Supply = Currency + Deposit

Money Supply = 116,400 + 120,000

                         = 236,400 million.

3. Calculate money multiplier?

• Bank A:

Deposits = 120,000 million

R= 3% of 120,000 million= 3600 million (120,000*3/100)

Loans= 120,000- 3600 = 116,400 million.

• Bank B:

Deposits = 116,400 million

R= 3% of 116,400 million= 3,492 million (116,400*3/100)

Loans= 116,400- 3,492 = 112,908 million.

Money Supply = Currency + Deposit

Money Supply = 112,908+ 116,400

                         = 229,308 million.

• Bank C :

Deposits = 112,908 million

R= 3% of 112,908 million= 3,388 million (116,400*3/100)

Loans= 112,908- 3,388 = 109,520 million.

Money Supply = Currency + Deposit

Money Supply = 109,520+ 112,908

                         = 222,428 million.

Answer 1

Part a) T- account for FNB

Deposits = 120,000 million

R= 3% of 120,000 million= 3600 million (120,000*3/100)

Loans= 120,000- 3600 = 116,400 million

Reserves 3600 Loan 116400

Deposits 120400

Part b) Money Supply = Currency + Deposit

Money Supply = 116,400 + 120,000

                         = 236,400 million.

Part c) Money Multiplier= 1/ Reserve Ratio

Money Multiplier= 1/0.03= 33.3333

Money Multiplier is defined as the amount of money the banking system generates with each dollar of resrves.. That means Initial deposit of 120000 million will end up creating a total of 120000*33.33333=4000000 million in new money