Exercise 4: Suppose an individual makes a deposit of $100 into a bank and that rrr = 10% and the bank loans out all excess reserves. What is the change in the money supply after the money creation process has finished? Step 0: Start with the initial change in the banking system's balance sheet. Banking System Assets Liabilities Step 1-2: A bank lends its excess reserves since the Fed only requires a fraction of the deposit to be held back for withdrawal liabilities. Step 3: This money is spent purchasing goods and services. Step 4: Proceeds from purchases are deposited into banks. Step 5: Banks receive deposits and split it into required reserve and excess reserves. After this process: Banking System Assets Liabilities 152 What is the change in the money supply? AM= AC + AD = Cycle 2: If the bank decides to not hold excess reserves and loans out the $81, then this process repeats. Repeat steps 1 - 5 using the above balance sheet. ER: $ -> L: $ -> Businesses: $ -> D: $ 1) RR: $ 2) ER: $ Banking System Assets Liabilities Cycle 3 ER: $ -> L: $ -> Businesses: $ -> D: $ 1) RR: $ 2) ER: $ Banking System Assets Liabilities Cycle 4 ER:$ -> L: $ -> Businesses: $ ->D: $ 1) RR: $ 2) ER: $ Banking System Liabilities Assets 153