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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%. Kenji, a client of First Main Street Bank, deposits $1,500,000 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

Reserves $1,500,000 Deposits $1,500,000

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) 1,500,000 120,000 300,000Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) First Main Street Bank 1,500,000 300,000 1,200,000 Second Republic Bank 1,200,000 240,000 960,000 Third Fidelity Bank 960,000 192,000 768,000 Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of $750,000 * in demand deposits