If a bank receives K500000 in deposit and if the reserve ratio is 30%, calculate the total amount of credit that can be created through the credit creation process.
The total amount of credit that can be created through the credit creation process can be calculated using the money multiplier formula.
Money Multiplier = 1 / Reserve Ratio
In this case, the reserve ratio is 30%, so the money multiplier would be:
Money Multiplier = 1 / 0.30
Money Multiplier = 3.33
Now, to calculate the total amount of credit that can be created, we use the formula:
Total Credit = Total Reserves x Money Multiplier
Total Reserves = K500,000
Money Multiplier = 3.33
Total Credit = K500,000 x 3.33
Total Credit = K1,665,000
Therefore, the total amount of credit that can be created through the credit creation process will be K1,665,000.
Apologies the reserve ratio is 20% not 30%.
No problem! If the reserve ratio is 20%, we can recalculate the total amount of credit that can be created through the credit creation process.
Money Multiplier = 1 / Reserve Ratio
Money Multiplier = 1 / 0.20
Money Multiplier = 5
Now, we can use the formula to calculate the total amount of credit that can be created:
Total Credit = Total Reserves x Money Multiplier
Total Credit = K500,000 x 5
Total Credit = K2,500,000
Therefore, with a reserve ratio of 20%, the total amount of credit that can be created through the credit creation process will be K2,500,000.
Apologies the bank received a deposit of K50000 not K500000.
No problem! If the bank received a deposit of K50000 and the reserve ratio is 20%, we can recalculate the total amount of credit that can be created through the credit creation process.
Total Reserves = K50000
Money Multiplier = 1 / 0.20 = 5
Total Credit = Total Reserves x Money Multiplier
Total Credit = K50000 x 5
Total Credit = K250000
Therefore, with a deposit of K50000 and a reserve ratio of 20%, the total amount of credit that can be created through the credit creation process will be K250000.