7. 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%. TheFederal Reserve buys a government bond worth $200,000 from Sean, a client of First Main Street Bank. He deposits the money into his checkingaccount 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).AssetsLiabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ràtio is 5%.Hint: If the change is negative, be sure to enter the value as negative number.Amount Deposited Change in Excess Reserves(Dollars)(Dollars)200,000Now, suppose First Main Street Bank loans out all of its new excess reserves to Rina, who immediately uses the funds to write a check to Musashi.Musashi deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excessreserves to Bob, who writes a check to Yvette, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its newexcess reserves to Cho in turn.Change in Required Reserves(Dollars)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 BankSecond Republic BankThird Fidelity BankIncrease in Deposits(Dollars)Increase in Required Reserves(Dollars)Increase in Loans(Dollars)Assume 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

A bank is a financial institution that accepts deposits from customers and uses those funds to make…

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all haw Federal Reserve buys a government bond worth $200,000 from Sean, a client of First account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-accou Assets Liabil

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all haw Federal Reserve buys a government bond worth $200,000 from Sean, a client of First account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-accou Assets Liabil

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

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 5%. The
Federal Reserve buys a government bond worth $200,000 from Sean, a client of First Main Street Bank. He deposits the money 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 ràtio is 5%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount Deposited Change in Excess Reserves
(Dollars)
(Dollars)
200,000
Now, suppose First Main Street Bank loans out all of its new excess reserves to Rina, who immediately uses the funds to write a check to Musashi.
Musashi 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 Bob, who writes a check to Yvette, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new
excess reserves to Cho in turn.
Change in Required Reserves
(Dollars)
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 Deposits
(Dollars)
Increase in Required Reserves
(Dollars)
Increase in Loans
(Dollars)
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these
in demand deposits.
assumptions, the $200,000 injection into the money supply results in an overall increase of

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