Initially, money is created by Fed by printing bills and coins. But, in an economy there is much more money than the currency in calculation. If the reserve requirement is 20% and the bank loans out all deposits minus required reserve, a $100 deposit will create $5000. How is it possible? Please see the following table:
| Bank Gets | Bank Keeps
(Reserve Ratio: 20%) |
Bank Loans (80%) = Person Borrows | |
| Initial deposit | 10,000 | 2,000 | 8,000 |
| Second stage | 8,000 | 1,600 | 6,400 |
| Third stage | 6,400 | 1,280 | 5,120 |
| Fourth stage | 5,120 | 1,024 | 4,096 |
| Fifth stage | 4,096 | 819 | 3,277 |
| Sixth stage | 3,277 | 656 | 2,621 |
| Seventh stage | 2,621 | 524 | 2,097 |
| All other stages | 10,486 | 2,097 | 8,389 |
| TOTAL | 50,000 | 10,000 | 40,000 |
Words: 83
- Which of the tools of monetary policy did the Fed use in the emergency?
- Why did the grounding of aircraft cause the Fed to act?
- The chapter lists the duties the Fed must perform. Which duties are mentioned in the article?
- What forms did liquidity take?
- Do you think the Fed acted correctly?
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