Answer: This problem illustrates how banks create credit and can thereby lend out more
Chapter 0, Problem 82(choose chapter or problem)
This problem illustrates how banks create credit and can thereby lend out more money than has been deposited. Suppose that initially $100 is deposited in a bank. Experience has shown bankers that on average only 8% of the money deposited is withdrawn by the owner at any time. Consequently, bankers feel free to lend out 92% of their deposits. Thus $92 of the original $100 is loaned out to other customers (to start a business, for example). This $92 becomes someone elses income and, sooner or later, is redeposited in the bank. Thus 92% of $92, or $92(0.92) = $84.64, is loaned out again and eventually redeposited. Of the $84.64, the bank again loans out 92%, and so on. (a) Find the total amount of money deposited in the bank as a result of these transactions.
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