If Sam deposits $250 of cash into his checking account, the banking system can increase the money supply by?
A) Sam's $250 can create a loan of 80%; that is $200 That $200 can create a loan of $160 That $160 can create a loan of $128 and so on. The sequence will be like this: 250+200+160+128+102.40+81.92+65.54+52.4... ...and so on to infinity This is a geometric series with first term 250 and common ratio 0.8 [80%] The sum to infinity is given by S∞ = 250/(1 - 0.8) = 250/0.2 = 1250 Therefore, the money supply could increase by $1000 on top of Sam's original $250. But remember this involves an infinity of deposits and that cannot be achieved. Infinity is too great to be realistic. So, in real life, the credit creation will be less than $1000.
How do Islamic banks make money if they can't charge interest because of shari'a?
I've taken loans from Islamic and non-Islamic banks. They all make money, but differently.Let's say you want to buy a car for $10,000, over 5 years.Non-Islamic bankThe bank says: $10,000 compounded on a Monthly basis over the course of 5 years at a 4% interest rate would be worth: $12,210. They tell you let's make the monthly payment $200.They calculate the interest every month. Your first payment would be fully interest, your last one would have no interest in it.During the loan you can:Delay a payment (only interest for that is added to the loan, the 5 years increases)Take more money on the same loan (Refinance)Pay partially or fully.During the loan the bank can:Increase the interest rate (in some places, without telling you, and you keep paying the same $200 monthly but the 5 years increases)If the rate increases, or any payment is delayed you will pay more than $12,210.The loan is for $10,000 with interest payments monthly. You don't know if it will finish on the exact date.Islamic bankThe bank says I will buy the car for $10,000 , would you buy it for $15,000? (I say 15 for simpler calculations, it's usually just a little higher than a non-Islamic bank). We don't call it interest, it's profit.If you say yes they will buy it. You still have the option to refuse buying it from the bank.The $15,000 will be split into 60 payments of $250.During the loan you can't:Delay a payment (you have to pay it)Take more money on the same loan (Refinance), you can take a new loan.Pay partially.During the loan the bank can:Force you to pay a payment.If you fully pay an Islamic loan before it's completion, most Islamic banks would pay you an "early repayment reward", which would reduce their profit.The loan is for $15,000 with NO interest payments. You know the exact date when it will finish.
What is the maximum amount that the money supply can increase when $1,000 cash is injected into a banking....?
$1,000/.20 = $5,000. 1. In theory it might take years to reach that level: $1,000x(1-.2) + $1,000x(1-.2)^2 + $1,000x(1-.2)^3 + ... 2. If some of the money is lost or destroyed when in cash form it might disappear forever from the system.