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%. Dmitri, a client of First Main Street Bank, deposits $750,000 into his checking account at First Main Street Bank.
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%. Dmitri, a client of First Main Street Bank, deposits $750,000 into his checking account at First Main Street Bank. Complete the following table to reect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities v v v v Building and furniture Deposits Loans e to show the effect of a new deposit an excess and required reserves when the required reserve ratio is 20%. Net worth _ tive, be sure to enter the value as negative number. Reserves hange in Excess Reserves Change in Required Reserves 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%. Dmitri, a client of First Main Street Bank, deposits $750,000 into his checking account at First Main Street Bank. Complete the following table to reect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities \"' " " " $150,000 $600,000 $750,000 Complete the following table to show ew deposit on excess and required reserves when the required reserve ratio is 20%. $1,800,000 Hint: If the change is negative, be su value as negative number. 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%. Dmitri, 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 Building and furniture Deposits Complete the following table to show the effect of a new depo Loans ed reserves when the required reserve ratio is 20%. Net worth Hint: If the change is negative, be sure to enter the value as Reserves Amount Deposited Change in Excess Reserves Ch erves7. 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%. Dmitri, a client of First Main Street Bank, deposits $750,000 into his checking account at First Main Street Bank. Complete the following table to reect any Changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Liabilities v V v 7 $150,000 $600,000 $750,000 Complete the following table to show the effect of a new deposit an excess and required reserves ired reserve ratio is 20%. $1,800,000 Hint: If the change is negative, be sure to enter the value as negative number. 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) 750,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Caroline, who immediately uses the funds to write a check to Antonio. Antonio 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 Jake, who writes a check to Frances, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Latasha 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 $750,000 injection into the money supply results in an overall increase of v in demand deposits
