Suppose that Person A deposits $180 (cash) at Bank A. Complete the following questions. Round your answers to two decimal places, if applicable.

(i) Suppose Bank A realizes that, on average, its customers only withdraw a portion of their deposits, and so it can lend

out some money to other customers. Bank A now chooses the reserve ratio to be 20% or 0.2. Bank A lends out the remaining amount of money as loans to Person B. Record this transaction on the balance sheet below:

Assets Liabilities

Reserves Deposits

Loans

(ii) Person B borrows this money as loans and pays to Person C. Suppose Person C deposits this amount with Bank B. Bank B, similar to Bank A, also chooses a reserve ratio of 0.2 and issues the remaining cash as loans to Person D. Record this transaction on the balance sheet below:

Assets Liabilities

Reserves Deposits

Loans

(iii) Person D borrows this money as loans from Bank B and pays to Person E. Suppose Person E deposits this amount with Bank C. Bank C also chooses a reserve ratio of 0.2 and issues the remaining cash as loans to Person F. Record this transaction on the balance sheet below:

Assets Liabilities

Reserves Deposits

Loans

(iv) What is the money multiplier given that cash or currency ratio is zero?

(v) Find the new money supply and the amount of money (or loans) created

(vi) Now suppose the cash or currency ratio is 0.1. Find the new money multiplier, new money supply and the amount of money (or loans) created

(vii) Suppose commercial banks believe that in an economic recession the likelihood of collecting loans decreases. Discuss intuitively how this would affect the money supply, interest rate and real GDP