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Assuume all banks has no excess reserve, the min. reserve ratio is 20% and the no. of bank in the banking system is large.
1. If bank A receives a new current deposit of $1000, it can at best expand its loan by _______.
2. In the above case, Bank A decides to make loans (advances) by that amount, What will be the increase in the supply of money in the economy?
3. In the same case, if the advance made is redeposited in Bank B , Bank B can expand its loans by________.
4. In case Bnk B again advances by that amount, the total increase in money supply from the above process will be_____________.
5. Assuming that each time a new loan is redeposited in another bank by the maximum amount, the entire banking system can create _____________ deposits.
6. consider demand deposits and time deposits. Which one functions better as
i. a medium of exchange ?
ii. a store of value?
Explain your answers.
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