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Assume that Central Bank conducts an open market purchase of $1,000,000. Assume also that required reserves are 5 percent of deposits, and that banks hold
Assume that Central Bank conducts an open market purchase of $1,000,000. Assume also that required reserves are 5 percent of deposits, and that banks hold 5 percent of excess reserves and households hold no currency. Explain the detailed process of money creation in the economy and calculate the size of the money multiplier. Demonstrate your answers using banks' T-account.
Note: please show examples of up to two lending transactions.
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