Simple question ?

[killamanjaro]

Actually, I don't have the CFA material. I do have "Economics Private & Public Choice" and a few other books in money and banking.

StealthPlanner:

The potential deposit expansion multiplier is different from the deposit multiplier. New reserves come from Open Market operations. For example if the reserve ratio falls, then banks have more excess reserves that they can loan to create new deposits.

The example you gave was different. The example involved depositing 100 to create a deposit account.

JoeyDVivre:

Incorrect. As I stated earlier. A demand deposit is created but it does not include 100 in currency. The 100 in currency remains a part of the money supply until is it destroyed.

 

[killamanjaro]

Money supply does not equal monetary base.

The money supply is the money available as a medium of exchange. If I deposit 100 dollars in a bank account and the reserve requirement is 100 percent -- my 100 will belong to the bank. When the Fed wants to sell bonds to my bank, they'll use the 100 in currency that they originally got from me. So I have 100 in my checking account at the bank and the bank has 100 in its checking account at the Fed.

The monetary base is different. If I deposit 100 into the bank then the amount of currency in circulation will decrease by 100 and the bank reserves will increase by 100. Or, there is no change in the monetary base.

Another thing.

Isn't a deposit a loan to the bank?? Whether they use it to loan out or whether they hold it as reserves is irrelevant. I'm certain that this is so.



Edited 1 time(s). Last edit at Monday, September 4, 2006 at 11:10PM by killamanjaro.

 

[StealthPlanner]

Let's get back to the original question. How would you answer VC's question. Do you agree with D (1Mill/.20=$5.0 Mill)?

 

[killamanjaro]

Yes. The answer is D.

LOL, at "Simple Question" being the title.

 

[StealthPlanner]

As the old saying goes, when you're up to you tuchis in alligators, it's easy to forget your original task was to drain the swamp.