7. 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 20%. Kenji, a client of First Main Street Bank, deposits $750,000 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 20%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Required Reserves (Dollars) Change in Excess Reserves (Dollars) (Dollars) 750,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Ginny, who immediately uses the funds to write a check to Eric. Eric deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Paolo, who writes a check to Lucia, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Sharon 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) Increase in Loans (Dollars) (Dollars) First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an overall increase of in demand deposits.
7. 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 20%. Kenji, a client of First Main Street Bank, deposits $750,000 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 20%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Required Reserves (Dollars) Change in Excess Reserves (Dollars) (Dollars) 750,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Ginny, who immediately uses the funds to write a check to Eric. Eric deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Paolo, who writes a check to Lucia, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Sharon 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) Increase in Loans (Dollars) (Dollars) First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an overall increase of in demand deposits.
Chapter1: Making Economics Decisions
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Transcribed Image Text:7. 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 20%. Kenji, a client of First Main Street Bank, deposits $750,000 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 20%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount Deposited
Change in Required Reserves
(Dollars)
Change in Excess Reserves
(Dollars)
(Dollars)
750,000
Now, suppose First Main Street Bank loans out all of its new excess reserves to Ginny, who immediately uses the funds to write a check to Eric. Eric deposits the funds immediately into his checking account at Second Republic Bank.
Then Second Republic Bank lends out all of its new excess reserves to Paolo, who writes a check to Lucia, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to
Sharon 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)
Increase in Loans
(Dollars)
(Dollars)
First Main Street Bank
Second Republic Bank
Third Fidelity Bank
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an
overall increase of
in demand deposits.
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