This mathematics problem involves applying core mathematical principles and formulas. Below you will find a complete step-by-step solution with detailed explanations for each step, helping you understand not just the answer but the method behind it.
ScanSolve AI Answer
Here's the credit creation analysis: a) Draw the initial balance sheet: Step 1: Calculate initial liquid assets and loans. Given an initial deposit of K600 million and an LGS ratio of 20%. Initial Liquid Assets = 20\% × K600 million = 0.20 × K600 million = K120 million Initial Loans = K600 million - K120 million = K480 million The initial balance sheet is: |l|l| Assets & Liabilities \\ Liquid Assets & K120 million & Deposits & K600 million \\ Loans & K480 million & & \\ Total Assets & K600 million & Total Liabilities & K600 million \\ b) Calculate the Additional Credit Created (ACC): Step 2: Calculate the Bank Credit Multiplier. Bank Credit Multiplier = (1)/(LGS ratio) = (1)/(0.20) = 5 Step 3: Calculate the initial excess reserves from the new deposit. New Deposit = K40 million Required Reserves = 20\% × K40 million = 0.20 × K40 million = K8 million Initial Excess Reserves = New Deposit - Required Reserves = K40 million - K8 million = K32 million Step 4: Calculate the Additional Credit Created (ACC). The ACC represents the total new loans created by the banking system. ACC = Initial Excess Reserves × Bank Credit Multiplier = K32 million × 5 = K160 million c) Calculate the Bank Credit Multiplier: Step 5: Calculate the Bank Credit Multiplier. Bank Credit Multiplier = (1)/(LGS ratio) = (1)/(0.20) = 5 d) Calculate the Multiplier Effect: Step 6: Calculate the Multiplier Effect. The Multiplier Effect is the total increase in deposits in the banking system due to the new deposit. Multiplier Effect = New Deposit × Bank Credit Multiplier = K40 million × 5 = K200 million e) Draw the final balance sheet showing the multiplier effect: Step 7: Calculate the final total deposits, liquid assets, and loans. Final Total Deposits = Initial Deposits + Multiplier Effect = K600 million + K200 million = K800 million Final Liquid Assets = 20\% × K800 million = 0.20 × K800 million = K160 million Final Loans = K800 million - K160 million = K640 million The final balance sheet is: |l|l| Assets & Liabilities \\ Liquid Assets & K160 million & Deposits & K800 million \\ Loans & K640 million & & \\ Total Assets & K800 million & Total Liabilities & K800 million \\ Last free one today — make it count tomorrow, or type /upgrade for unlimited.