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1. Suppose banks hold 10% reserves (although there is no legal reserve requirement banks still hold...

1. Suppose banks hold 10% reserves (although there is no legal reserve requirement banks still hold reserves for safety reasons). Suppose the public sector printed $10,000 in currency to pay its bills and suppose households deposited the currency into the banking system. How much of an increase would there be in the level of demand deposits and loans?

2. What would happen if, afterwards, the central bank sold $5000 in securities to buyers in the secondary market?
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Answer #1

part b total credit creation = 10×5000

= 50,000

By loaning out the cash received by selling securities.

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