Suppose that a lottery winner deposits $12 million in cash into her transactions account at the Bank
Question:
Suppose that a lottery winner deposits $12 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 20 percent, no loans, and no excess reserves in the banking system prior to this deposit.
(a) Use step 1 in the following T-accounts to show how her deposit affects the balance sheet at B of A.
(b) Has the money supply been changed by her deposit?
(c) Use step 2 here to show the changes at B of A after the bank fully uses its new lending capacity.
(d) Has the money supply been changed in step 2?
(e) In step 3 the new borrower(s) writes a check for the amount of the loan in step 2. That check is deposited at another bank, and B of A pays the other bank when the check clears. What does the B of A balance sheet look like now?
(f) After the entire banking system uses the lending capacity of the initial ($12 million) deposit, by how much will the following have changed?
Total reserves
Total deposits
Total loans
Cash held by public
The money supply
Balance SheetBalance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Step by Step Answer:
a Step 1 Winnings deposited Bank of America b No c Step 2 Loans made Bank of America d Yes e Step 3 Check clears Bank of America f Total reserves 12 m...View the full answer
The Macro Economy Today
ISBN: 978-1259291821
14th edition
Authors: Bradley R. Schiller, Karen Gebhardt
