3. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The desired reserve ratio is 20%. The Federal Reserve buys a government bond worth $1,500,000 from Shen, a customer of First Main Street Bank. He deposits the money into his chequing account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a desired reserve ratio of 20%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 1,500,000 Now, suppose First Main Street Bank lends out all of its new excess reserves to Poornima, who immediately writes a cheque for the full amount to Manuel. Manuel then immediately deposits the funds in his chequing account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Antonio, who writes a cheque to Valerie, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Caroline. 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. First Main Street Bank Second Republic Bank Third Fidelity Bank Increase in Chequable Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) Assume this process continues, with each successive loan deposited into a chequing account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of in chequable deposits.
3. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The desired reserve ratio is 20%. The Federal Reserve buys a government bond worth $1,500,000 from Shen, a customer of First Main Street Bank. He deposits the money into his chequing account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a desired reserve ratio of 20%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 1,500,000 Now, suppose First Main Street Bank lends out all of its new excess reserves to Poornima, who immediately writes a cheque for the full amount to Manuel. Manuel then immediately deposits the funds in his chequing account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Antonio, who writes a cheque to Valerie, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Caroline. 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. First Main Street Bank Second Republic Bank Third Fidelity Bank Increase in Chequable Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) Assume this process continues, with each successive loan deposited into a chequing account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of in chequable deposits.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:3. The money creation process
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The desired reserve ratio is 20%. The
Federal Reserve buys a government bond worth $1,500,000 from Shen, a customer of First Main Street Bank. He deposits the money into his chequing
account at First Main Street Bank.
Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans).
Assets
Liabilities
Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a desired reserve ratio of 20%.
Hint: If the change is negative, be sure to enter the value as a negative number.
Amount Deposited
(Dollars)
1,500,000
Change in Excess Reserves
(Dollars)
Change in Required Reserves
(Dollars)
Now, suppose First Main Street Bank lends out all of its new excess reserves to Poornima, who immediately writes a cheque for the full amount to
Manuel. Manuel then immediately deposits the funds in his chequing account at Second Republic Bank. Then Second Republic Bank lends out all of its
new excess reserves to Antonio, who writes a cheque to Valerie, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity
lends out all of its new excess reserves to Caroline.
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.
First Main Street Bank
Second Republic Bank
Third Fidelity Bank
Increase in Chequable Deposits Increase in Required Reserves Increase in Loans
(Dollars)
(Dollars)
(Dollars)
Assume this process continues, with each successive loan deposited into a chequing account and no banks keeping any excess reserves. Under these
assumptions, the $1,500,000 injection into the money supply results in an overall increase of
in chequable deposits.
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