7. The money creation process

Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 5%. Bob, a Southeast Mutual Bank customer, deposits $200,000 into his checking account at the local branch.

1)

Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).

Assets		Liabilities
(Buidling/Deposits/Loans/Net worth/Reserves)	($10,000/190000/200000/420000)	(Buidling/Deposits/Loans/Net worth/Reserves)	($10,000/190000/200000/420000)

2)

Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 5%.

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)
200,000	?	?

3)

Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Yvette, who immediately uses the funds to write a check to Sean. Sean deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Eric, who writes a check to Cho, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Ginny 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)
Southeast Mutual Bank	?	?	?
Walls Fergo Bank	?	?	?
PJMorton Bank	?	?	?

4) Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $200,000 injection into the money supply results in an overall increase of ($400,000/3,800,000/4,000,000) in demand deposits.