Answer Happy

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)
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)