Answer to Question #52320 in Macroeconomics for Samiya naseer

Question

Suppose Mr. Y deposits AED 100,000 into a one year Certificate of Deposit at 5% interest.
The Central Bank sets the reserve ratio for the banks at 10%.
a) illustrate how the bank creates money with the help of the given information. Show first five steps.
b) calculate the total money creation in the economy with the help of formula.

Answer 1

a) Most money is in the form of bank deposits in the contemporary economic system. The main way in which those bank deposits are created, is through loans made by commercial banks. When a bank makes a loan, a deposit is created at the same time in the bank account held by the borrower. In that way, new money is created.
b) the total money creation in the economy is 100,000/0.1 = AED 1,000,000.