5. The money creation processSuppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. Larry,a client of First Main Street Bank, deposits $200,000 into his checking account at First Main Street Bank.Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).AssetsLiabilitiesComplete 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 negative number.Amount Deposited Change in Excess ReservesChange in Required Reserves(Dollars)(Dollars)(Dollars)200,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Janet, who immediately uses the funds to write a check to Felix. Felixdeposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reservesto Raphael, who writes a check to Megan, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excessreserves to Susan in turn.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.Increase in Deposits Increase in Required Reserves(Dollars)(Dollars)Increase in Loans(Dollars)First Main Street BankSecond Republic BankThird Fidelity BankAssume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under thesein demand deposits.assumptions, the $200,000 injection into the money supply results in an overall increase of

* SOLUTION :- From the given information the calculation is given as ,

5. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. Larry, a client of First Main Street Bank, deposits $200,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities 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 negative number. Change in Required Reserves Amount Deposited Change in Excess Reserves (Dollars) (Dollars) (Dollars)

5. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. Larry, a client of First Main Street Bank, deposits $200,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities 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 negative number. Change in Required Reserves Amount Deposited Change in Excess Reserves (Dollars) (Dollars) (Dollars)

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter14: Banking And The Money Supply

Section: Chapter Questions

Problem 2.3P

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