Suppose you deposit $2,000 in currency into your checking account at a branch of Bank of America, which we will assume has no excess reserves at the time you make your deposit. Also assume that the required reserve ratio is 0.20, or 20 percent.

1. Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet.
2. Suppose that Bank of America makes the maximum loan it can from the funds you deposited. Using a T-account, show the initial effect of granting the loan on Bank of America's balance sheet. Also include on this T-account the transaction from part (a).
3. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that the person receiving the check deposits it in a branch of Citibank. Show the effect of these transactions on the balance sheets of Bank of America and Citibank after the check has been cleared. (On the T-account for Bank of America, include the transactions from parts (a) and (b).)

a. What is the maximum increase in checking account deposits that can result from your $2,000 deposit? What is the maximum increase in the money supply? Briefly explain.