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You take $150 you had kept under your mattress and deposit it in your bank account. Suppose this $150 stays in the banking system as reserves and banks hold reserves equal to 12.5 percent of deposits. The total amount of deposits in the banking system increases by_______, and the money supply increases by______.

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alinakincsem

Answer:

The answer is $12.

Using the formula total credit /Money created = Total deposit /Cash reserve ratio

Total deposit = $150

Cash reserve ratio = 12.5%

150/12.5

=12

Therefore, the total money created in the banking system is $12. From the above, it could be rightly said that creation of money by banks is a process whereby the banks received deposit from customers and give the deposit to borrowers in the form of loan after deducting cash or reserve ratio.

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