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What is the LGS ratio in the balance sheet above? If the Liquid Asset ratio were 25%, what would be the new liquid asset? new lending amount? credit creation multiplier? What would be the final increase in money after the full credit creation process?

Economics

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Part 14

Part a· 1 step

Step 1: Identify the liquid assets and deposits from the balance sheet.

Liquid Assets = K 400
Deposits = K 2000

  1. Calculate the LGS ratio.

    LGS Ratio=Liquid AssetsDeposits×100%\text{LGS Ratio} = \frac{\text{Liquid Assets}}{\text{Deposits}} \times 100\% LGS Ratio=K 400K 2000×100%\text{LGS Ratio} = \frac{\text{K 400}}{\text{K 2000}} \times 100\% LGS Ratio=0.20×100%=20%\text{LGS Ratio} = 0.20 \times 100\% = 20\%

    The LGS ratio is 20%\boxed{\text{20\%}}.

Part b(i)

Step 1: Calculate the new liquid asset amount.

Given a new Liquid Asset ratio of 25%25\%. Deposits remain K 2000.

New Liquid Asset=New Liquid Asset Ratio×Deposits\text{New Liquid Asset} = \text{New Liquid Asset Ratio} \times \text{Deposits} New Liquid Asset=0.25×K 2000\text{New Liquid Asset} = 0.25 \times \text{K 2000} New Liquid Asset=K 500\text{New Liquid Asset} = \text{K 500}

The new liquid asset is K 500\boxed{\text{K 500}}.

Part b(ii)

Step 1: Calculate the new lending amount.

Total Assets = Deposits = K 2000 (since Assets must equal Liabilities)

New Lending Amount=Total Assets−New Liquid Asset\text{New Lending Amount} = \text{Total Assets} - \text{New Liquid Asset} New Lending Amount=K 2000−K 500\text{New Lending Amount} = \text{K 2000} - \text{K 500} New Lending Amount=K 1500\text{New Lending Amount} = \text{K 1500}

The new lending amount is K 1500\boxed{\text{K 1500}}.

Part b(iii)

Step 1: Calculate the credit creation multiplier.

Credit Creation Multiplier=1New Liquid Asset Ratio\text{Credit Creation Multiplier} = \frac{1}{\text{New Liquid Asset Ratio}} Credit Creation Multiplier=10.25\text{Credit Creation Multiplier} = \frac{1}{0.25} Credit Creation Multiplier=4\text{Credit Creation Multiplier} = 4

The credit creation multiplier is 4\boxed{4}.

Part c· 1 step

Step 1: Identify the initial deposit and the credit creation multiplier.

Initial Deposit = K 2000
Credit Creation Multiplier = 4 (from part b(iii))

  1. Calculate the final increase in money.

    Final Increase in Money=Initial Deposit×Credit Creation Multiplier\text{Final Increase in Money} = \text{Initial Deposit} \times \text{Credit Creation Multiplier} Final Increase in Money=K 2000×4\text{Final Increase in Money} = \text{K 2000} \times 4 Final Increase in Money=K 8000\text{Final Increase in Money} = \text{K 8000}

    The final increase in money is K 8000\boxed{\text{K 8000}}.

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