20 Banks in New Transylvania have a desired reserve ratio of 10 per cent and no excess reserves. The currency drain ratio is 50 per cent. 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?