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homework#3

# homework#3 - Chien Chiu Hsiung Economic 2100 Chapter 14...

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Chien Chiu Hsiung Economic 2100 April 28, 2011 Chapter 14: problem 8 The table and the graph shows that the loans and deposits get smaller and smaller, and eventually become close to zero. The initial deposit of \$500 is then deposited and loaned successively until the fractional reserve you see in the graph reduces to zero. In round 1, there is a cash deposit of \$500 and the bank must hold 20% of the deposit in the reserves. Therefore, 20% of \$500 deposit is \$100 in the required reserves and the excess reserves left over is \$400 that can be loaned out to people. However, the problem states public wants to hold 50% of the loan in currency, so 50% of \$400 is \$200. That \$200 is the loan that will be deposited in round 2 and we use the same method in round 2 and so on. If an economy in which the total amount of the loan is deposited in the banking system and the public does not hold any of the loan in currency then the next deposits will be higher when compare with my answer. If people do not hold their money in currency, then the banks are willing to loan more money and increase the money supply. For example, in round 1 and round 2, if round 1, the loan is \$400 and the public

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