Assume all banks have the same reserve requirement, 10% and you just remember you buried $1,000 in your backyard 2 years ago. You take the thousand dollars to your bank and deposit it.
a) When the rounds have been exhausted, what is the total amount of deposits in the banking system? Show and explain.
b) Using the total deposit number, show the amount of required reserves created and the amount of loans created by this process.
c) You will have to think a bit about this one. Using the $1,000 deposit and reserve requirement is still 10%, suppose I tell you that in each round, 10% is withdrawn for cash and this is a leakage. Show and explain what is the multiplier now and what would be total deposits at the end of the process.
d) From parts ‘a’ and ‘c’, what has happened and why?
e) What is the size of the FOMC and where do they come from?