5. Suppose the Bank of England (the UK's Central Bank) determines the reserve rate (rr) to be 15% and all banks should f

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5 Suppose The Bank Of England The Uk S Central Bank Determines The Reserve Rate Rr To Be 15 And All Banks Should F 1 (72.65 KiB) Viewed 55 times

5. Suppose the Bank of England (the UK's Central Bank) determines the reserve rate (rr) to be 15% and all banks should follow this rate when lending. (a) Using the fractional-reserve banking theory, calculate how much credit can be created in the UK economy if the initial loan is £300,000 and all created loans are deposited in another bank account and the number of banks involved in this process goes to infinity. (Show all your calculations) (5 marks) (b) Heterodox economists believe that while the theory of fractional-reserve banking brings the creation of credit by banks into the discussion of money supply, the theory suffers from the fact that the money supply is still exogenous. Explain this view through the relation between money supply (M) and the monetary base (H) discussed in the lecture. (5 marks)