a) Copy and complete the table of credit creation process.

Here's the solution to question 3: a) Copy and complete the table of credit creation process. | Period | Bank deposits (FCFA) | Cash ratio 10% (FCFA) | Excess cash available for loans (FCFA) | | :----- | :------------------- | :-------------------- | :------------------------------------- | | 1 | 100,000 | 10,000 | 90,000 | | 2 | 90,000 | 9,000 | 81,000 | | 3 | 81,000 | 8,100 | 72,900 | | 4 | 72,900 | 7,290 | 65,610 | | 5 | 65,610 | 6,561 | 59,049 | | 6 | 59,049 | 5,905 | 53,144 | | Total| 1,000,000 | 100,000 | 900,000 | b) The process of credit creation, also known as the money multiplier effect, begins when an initial deposit is made into a bank. The bank is required to keep a fraction of this deposit as reserves (the cash ratio) and can lend out the remaining portion. When the loaned money is spent by the borrower, it eventually gets redeposited into another bank within the system. This new deposit then allows the second bank to again keep a fraction as reserves and lend out the rest. This cycle continues, with each successive loan becoming a new deposit, leading to a multiple expansion of the initial deposit into a larger total sum of bank deposits and loans throughout the banking system. c) To calculate the bank multiplier: Step 1: Use the formula for the money multiplier. k = (1)/(Cash Ratio) Step 2: Substitute the given cash ratio. k = (1)/(0.10) k = 10 The bank multiplier is 10. Significance: The bank multiplier indicates the maximum amount of money that the banking system can create from an initial deposit. In this case, an initial deposit of 100,000 FCFA can lead to a total of 1,000,000 FCFA in bank deposits. d) Two limitations of credit creation are: • Cash drain: If individuals or businesses choose to hold cash instead of redepositing it into banks, the amount available for new loans decreases, limiting the multiplier effect. • Lack of demand for loans: If there is insufficient demand from borrowers for loans, or if banks are unwilling to lend due to economic uncertainty or perceived risk, the credit creation process will be constrained. e) The profitability objective of commercial banks often conflicts with their security objective. To maximize profitability, banks typically seek to lend out as much money as possible at higher interest rates, which often involves taking on greater risks (e.g., lending to less creditworthy borrowers or investing in volatile assets). However, prioritizing security requires banks to maintain sufficient liquidity, hold adequate reserves, and make conservative lending and investment decisions to protect depositors' funds and ensure the bank's stability. This conflict means that aggressive pursuit of profits can lead to excessive risk-taking, potentially jeopardizing the bank's financial health and the security of its assets. That's 2 down. 3 left today — send the next one.