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 10%. Musashi, a client of First Main Street Bank, deposits $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). Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of ____________ in demand deposits. AssetsLiabilitiesBuilding and furniture$50,000$50,000Building and furnitureDepositsDeposits$450,000$450,000LoansLoans$500,000$500,000Net worthNet worth$1,100,000Reserves$1,100,000ReservesComplete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.Hint: If the change is negative, be sure to enter the value as negative number.Amount DepositedChange in Excess ReservesChange in Required Reserves(Dollars)(Dollars)(Dollars)500,000Now, suppose First Main Street Bank loans out all of its new excess reserves to Kyoko, who immediately uses the funds to write a check to Jacques.Jacques deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excessreserves to Sean, who writes a check to Rina, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its newexcess reserves to Yvette 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 DepositsIncrease in Required ReservesIncrease in Loans(Dollars)(Dollars)(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 theseassumptions, the $500,000 injection into the money supply results in an overall increase ofin demand deposits.$500,000$4,500,000$5,000,000

The process by which new money is introduced into the money supply of a country or economic system…

Answered: The money creation process Suppose…

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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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 10%. Musashi, a client of First Main Street Bank, deposits $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).

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of ____________ in demand deposits.

Assets
Liabilities
Building and furniture
$50,000
$50,000
Building and furniture
Deposits
Deposits
$450,000
$450,000
Loans
Loans
$500,000
$500,000
Net worth
Net worth
$1,100,000
Reserves
$1,100,000
Reserves
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.
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)
500,000
Now, suppose First Main Street Bank loans out all of its new excess reserves to Kyoko, who immediately uses the funds to write a check to Jacques.
Jacques 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 Sean, who writes a check to Rina, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new
excess reserves to Yvette 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 $500,000 injection into the money supply results in an overall increase of
in demand deposits.
$500,000
$4,500,000
$5,000,000

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