Banks in New Transylvania have a desired reserve ratio of 10 percent and no excess reserves. The currency drain ratio is 50 percent. Then the central bank increases the monetary base by $1,200 billion.
a. How much do the banks lend in the first round of the money creation process?
b. How much of the initial amount lent flows back to the banking system as new deposits?
c. How much of the initial amount lent does not return to the banks but is held as currency?
d. Why does a second round of lending occur?
e. If the currency drain ratio increased to 60 percent, what would happen to the money multiplier?
f. If the desired reserve ratio decreased to 5 percent, what would happen to the money multiplier?