7. The money creation process

docx

School

South Texas College *

*We aren’t endorsed by this school

Course

2301

Subject

Economics

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by SuperHumanPencilWalrus32

Suppose Southeast Mutual Bank, Wells Fargo Bank, and JP Morgon Bank all have zero excess reserves. The required reserve ratio is presently set at 5%. Jake, a Southeast Mutual Bank customer, deposits $200,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Explanation: When Jake deposits the $200,000 into Southeast Mutual Bank, it creates both an asset and a liability for the bank. On the asset side of the T-account, the $200,000 increases the bank's reserves. The bank can use some of these additional reserves to make loans to other people. On the liability side of the T-account, the $200,000 is recorded as a demand deposit, because Jake could demand his deposit back at any time by coming into the bank and asking for it, by writing a check, or by using a debit card. Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 5%. Hint: If the change is negative, be sure to enter the value as a negative number. Explanation: Because the required reserve ratio is 5%, Southeast Mutual Bank is required to hold 5% of its fresh reserves (that is, the initial deposit). Since 5% of $200,000 is $10,000, this means that Southeast Mutual Bank's required reserve has increased by $10,000. The remaining 95% of the fresh reserves, or $190,000, are excess reserves and can be used to make loans.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. You already found that of the $200,000 initial deposit, 5% (or $10,000) had to be held as required reserves and the remaining 95% (or $190,000) could be loaned out. If you follow that $190,000 loan, you can see that when it is deposited into Wells Fargo Bank, 5% of that $190,000 must be held as required reserves by Wells Fargo Bank and the remaining 95% can be loaned out: Increase in Wells Fargo Bank's Required Reserves = 0.05×$190,000 = $9,500 Increase in Wells Fargo Bank's Excess Reserves = 0.95×$190,000 = $180,500 Now, those $180,500 of excess reserves can be loaned out. When they are loaned and then deposited into JP Morgon Bank, JP Morgon Bank's required and excess reserves increase in the same way: Increase in JP Morgon Bank's Required Reserves = 0.05×$180,500 = $9,025 Increase in JP Morgon Bank's Excess Reserves = 0.95×$180,500 = $171,475 Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $200,000 injection into the money supply results in an overall increase of $4,000,000 in demand deposits. Explanation: Under the assumptions stated in the problem, you can use the money multiplier to calculate the eventual effect of the $200,000 injection into the money supply.

The formula for the money multiplier is 1/r, where r is the required reserve ratio. Therefore, the resulting change in demand deposits is as follows: Change in Demand Deposits = Change in Fresh Reserves (that is, the Initial Deposit) × 1r = $200,000×10.05 = $4,000,000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Related Documents

Digit_recog_Q2.py

Digit_recog.py

BUS4070_u05a1.docx

Chapter 13 Review Questions.pdf

Test-2 (Solutions).pdf

Quiz-7.docx

Topic 7 - Worksheet. Filled in..pdf

ISOM835_Lab 8_Categorical Data Analysis_solution.pdf

MGEC72-Assignment-3.pdf

MGEC72-Assignment-2.pdf

Digit_recog_Q2 copy.py

tep.txt

Recommended textbooks for you

Macroeconomics: Private and Public Choice (MindTa...

Economics

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:Cengage Learning

Economics: Private and Public Choice (MindTap Cou...

Economics

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:Cengage Learning

MACROECONOMICS

Economics

ISBN:9781337794985

Author:Baumol

Publisher:CENGAGE L

ECON MACRO

Economics

ISBN:9781337000529

Author:William A. McEachern

Publisher:Cengage Learning

Exploring Economics

Economics

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:SAGE Publications, Inc

Survey Of Economics

Economics

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Cengage,

SEE MORE TEXTBOOKS

Recommended textbooks for you

Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning
MACROECONOMICS
Economics
ISBN:9781337794985
Author:Baumol
Publisher:CENGAGE L
ECON MACRO
Economics
ISBN:9781337000529
Author:William A. McEachern
Publisher:Cengage Learning
Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc
Survey Of Economics
Economics
ISBN:9781337111522
Author:Tucker, Irvin B.
Publisher:Cengage,