Because the required reserve ratio is 5%, the $200,000 withdrawaldecreases First Main Street Bank's required reserves by$10,000 . In order to maintain the required reserve ratio, First Main Street Bank now mustincrease its reserves by . One possible way to is todecrease its outstanding loans.

Now suppose Caroline repays her loan of $190,000 to First Main Street Bank by writing a check issued by Second Republic Bank. First Main Street Bank uses funds from a loan repayment to increase its reserves instead of making new loans. Second Republic Bank then replenishes its reserves by using the funds from loan repayments by Antonio, who writes a check issued by Third Fidelity Bank. Third Fidelity Bank then uses a loan repayment from Frances to replenish its reserves instead of making new loans.