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Chapter 14: Q.26 (page 353)

Should banks have to hold 100% of their deposits? Why or why not?

Short Answer

Expert verified

The holding of100% of deposits by the banks is not allowed anywhere.

Step by step solution

01

:Concept Introduction

The quantum of plutocrat the banking system creates through the plutocrat multiplier is the quantum of reserves the bank holds. Banks don't hold100%of their deposits.

02

:Explanation of Solution

The reason behind banks not holding its 100%of their deposits is to make a profit by using these deposits to lend loans that earn interest, instead of holding money as a deposit that earns nothing. Due to this reason, the holding of 100%of deposits by the banks is not allowed anywhere

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Most popular questions from this chapter

Explain why you think the Federal Reserve Bank

tracks M1 and M2.

If you take $100 out of your piggy bank and

deposit it in your checking account, how did M1

change? Did M2 change?

What do you think the Federal Reserve Bank did

to the reserve requirement during the 2008–2009 Great

Recession?

If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.

Humongous Bank is the only bank in the economy. The people in this economy have 20\(million in money, and they deposit all their money in Humongous Bank.

a. Humongous Bank decides on a policy of holding\)100reserves. Draw a T-account for the bank.

b. Humongous Bank is required to hold \(5%of its existing\)20million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans.

C. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original$19million loan?
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