The Fed makes an open-market purchase of $5 million in an economy in which no bank holds excess reserves and the assumptions of the simple multiplier hold with a reserve requirement of 8 percent. Draw up a table to show the amount of new deposits in each new bank (show the amounts in the first five of them), the additional reserves held by that bank, and the loans made by that bank, as each successive bank lends out its excess reserves. Finally, calculate the total amount of new deposits, of additional reserves, and of loans made in the economy.
What will be an ideal response?
NewAdditionalLoansBankDepositsReservesMade15.0000.4004.60024.6000.3684.23234.2320.3393.89343.8930.3113.58253.5820.2873.295Total62.5 5.0 57.5
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