Question

Evaluate the following statement “When a bank issues a loan, its liabilities and reserves increase by...

Evaluate the following statement “When a bank issues a loan, its liabilities and reserves increase by the amount of the loan” on the basis of the following assumptions:

(i) Reserves of the bank = $100 million

(ii) Existing loans = $900 million

(iii) Required reserve ratio is 10%

Now suppose that deposits and loans increase by $50 million simultaneously.

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