3. 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%. The Federal Reserve buys a government bond worth $500,000 from Manuel, a customer 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 balance sheet (before the bank makes any new loans).

Assets	Liabilities

Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 10%.

Hint: If the change is negative, be sure to enter the value as a 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 Kate, who immediately writes a check for the full amount to Hubert. Hubert then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Shen, who writes a check to Poornima, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Valerie.

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 Checkable Deposits	Increase in Required Reserves	Increase in Loans
(Dollars)	(Dollars)	(Dollars)
First Main Street Bank	500,000
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 checkable deposits.