The reserve ratio is 25%, so the Legal Global (LGS) ratio is 1 - 0.25 = 0.75
Using the multiplier approach, the total credit that can be created is calculated as:
Total credit = Initial deposit / LGS ratio
Total credit = 100000 / 0.75
Total credit = 133333.33
Therefore, the total credit that can be created after the full credit creation process is K133333.33.
A deposit of K100000 has been deposited into a bank at a reserve ratio of 25%.
Calculate the total credit that can be created after full credit creation process. Use the multiplier approach: 1/(LGS ratio)
11 answers
The multiplier is 4. Now calculate it again
If the multiplier is 4, then the total credit that can be created after the full credit creation process can be calculated as:
Total credit = Initial deposit x Multiplier
Total credit = 100000 x 4
Total credit = 400000
Therefore, with a multiplier of 4, the total credit that can be created after the full credit creation process is K400,000.
Total credit = Initial deposit x Multiplier
Total credit = 100000 x 4
Total credit = 400000
Therefore, with a multiplier of 4, the total credit that can be created after the full credit creation process is K400,000.
Now write up a balance sheet. The balance sheet must have a deposit, under liabilities, and liquid assets and loans under assets. Both the liabilities and assets must be equal or balance.
Balance Sheet:
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K100,000
Total Liabilities: K100,000
The balance sheet balances since the total value of assets (K500,000) is equal to the total value of liabilities (K100,000), which reflects the principle of accounting equation: Assets = Liabilities + Equity.
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K100,000
Total Liabilities: K100,000
The balance sheet balances since the total value of assets (K500,000) is equal to the total value of liabilities (K100,000), which reflects the principle of accounting equation: Assets = Liabilities + Equity.
Are you sure the deposit is not K400000?
In the context of the given scenario, the initial deposit made into the bank was K100,000. However, through the credit creation process and the application of the multiplier, the total credit that can be created is K400,000. The initial deposit amount remains K100,000, but the total amount of credit created in the banking system is K400,000.
Therefore, in the balance sheet:
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K100,000
Total Liabilities: K100,000
The balance sheet balances as the total value of assets (K500,000) is equal to the total value of liabilities (K100,000), where the total loans created of K400,000 account for the difference in assets and liabilities.
Therefore, in the balance sheet:
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K100,000
Total Liabilities: K100,000
The balance sheet balances as the total value of assets (K500,000) is equal to the total value of liabilities (K100,000), where the total loans created of K400,000 account for the difference in assets and liabilities.
Where is the total deposit??
I apologize for the oversight. Let's correct the balance sheet by including the total deposit:
Balance Sheet:
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K100,000
- Total Deposit: K100,000
Total Liabilities: K100,000
Now the balance sheet includes the total deposit of K100,000 under liabilities. The balance sheet is balanced as the total value of assets (K500,000) equals the total value of liabilities (K100,000 deposit + K400,000 loans).
Balance Sheet:
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K100,000
- Total Deposit: K100,000
Total Liabilities: K100,000
Now the balance sheet includes the total deposit of K100,000 under liabilities. The balance sheet is balanced as the total value of assets (K500,000) equals the total value of liabilities (K100,000 deposit + K400,000 loans).
The total deposit is K400000
Balance Sheet:
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K400,000
Total Liabilities: K400,000
Now, the total deposit is corrected to K400,000 on the balance sheet, which results in both sides of the balance sheet equalling K500,000 (Total Assets) and K400,000 (Total Liabilities), respectively.
Assets:
- Liquid Assets: K100,000
- Loans: K400,000
Total Assets: K500,000
Liabilities:
- Deposits: K400,000
Total Liabilities: K400,000
Now, the total deposit is corrected to K400,000 on the balance sheet, which results in both sides of the balance sheet equalling K500,000 (Total Assets) and K400,000 (Total Liabilities), respectively.