This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
QUESTION 14 a) Step 1: Identify the liquid assets and deposits from the balance sheet. Liquid Assets = K 400 Deposits = K 2000 Step 2: Calculate the LGS ratio. LGS Ratio = Liquid AssetsDeposits × 100\% LGS Ratio = K 400K 2000 × 100\% LGS Ratio = 0.20 × 100\% = 20\% The LGS ratio is 20\%. b) Given a new Liquid Asset ratio of 25\%. Deposits remain K 2000. (i) Step 1: Calculate the new liquid asset amount. New Liquid Asset = New Liquid Asset Ratio × Deposits New Liquid Asset = 0.25 × K 2000 New Liquid Asset = K 500 The new liquid asset is K 500. (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 New Lending Amount = K 2000 - K 500 New Lending Amount = K 1500 The new lending amount is K 1500. (iii) Step 1: Calculate the credit creation multiplier. Credit Creation Multiplier = (1)/(New Liquid Asset Ratio) Credit Creation Multiplier = (1)/(0.25) Credit Creation Multiplier = 4 The credit creation multiplier is 4. c) Step 1: Identify the initial deposit and the credit creation multiplier. Initial Deposit = K 2000 Credit Creation Multiplier = 4 (from part b(iii)) Step 2: Calculate the final increase in money. Final Increase in Money = Initial Deposit × Credit Creation Multiplier Final Increase in Money = K 2000 × 4 Final Increase in Money = K 8000 The final increase in money is K 8000. Drop the next question.