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%. Van, a client of First Main Street Bank, deposits $1,500,000 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 Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 1,500,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Sharon, who immediately uses the funds to write a check to Paolo. Paolo 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 Carlos, who writes a check to Amy, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Deborah 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 Increase in Loans (Dollars) (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 $1,500,000 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%. Van, a client of First Main Street Bank, deposits $1,500,000 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 Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 1,500,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Sharon, who immediately uses the funds to write a check to Paolo. Paolo 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 Carlos, who writes a check to Amy, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Deborah 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 Increase in Loans (Dollars) (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 $1,500,000 injection into the money supply results in an overall increase of ▼ in demand deposits.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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![## 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%. Van, a client of First Main Street Bank, deposits $1,500,000 into his checking account at First Main Street Bank.
### T-Account for 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**
- [ Space for input ]
**Liabilities**
- [ Space for input ]
### Effect of a New Deposit
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 a negative number.*
| Amount Deposited (Dollars) | Change in Excess Reserves (Dollars) | Change in Required Reserves (Dollars) |
|----------------------------|------------------------------------|--------------------------------------|
| 1,500,000 | | |
### Loan Transactions Process
Now, suppose First Main Street Bank loans out all of its new excess reserves to Sharon, who immediately uses the funds to write a check to Paolo. Paolo 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 Carlos, who writes a check to Amy, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Deborah in turn.
### Effect on Each Bank
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 (Dollars) | Increase in Required Reserves (Dollars) | Increase in Loans (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 $1,500,000 injection into the money supply results in an overall increase of [ Space for input ] in demand deposits.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F223bda9f-9efb-4a06-a2bc-317d4fee16da%2Fcf234042-68c7-4425-a32e-f8865b746079%2F22gvxun_processed.png&w=3840&q=75)
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%. Van, a client of First Main Street Bank, deposits $1,500,000 into his checking account at First Main Street Bank.
### T-Account for 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**
- [ Space for input ]
**Liabilities**
- [ Space for input ]
### Effect of a New Deposit
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 a negative number.*
| Amount Deposited (Dollars) | Change in Excess Reserves (Dollars) | Change in Required Reserves (Dollars) |
|----------------------------|------------------------------------|--------------------------------------|
| 1,500,000 | | |
### Loan Transactions Process
Now, suppose First Main Street Bank loans out all of its new excess reserves to Sharon, who immediately uses the funds to write a check to Paolo. Paolo 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 Carlos, who writes a check to Amy, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Deborah in turn.
### Effect on Each Bank
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 (Dollars) | Increase in Required Reserves (Dollars) | Increase in Loans (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 $1,500,000 injection into the money supply results in an overall increase of [ Space for input ] in demand deposits.
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