e 3. 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%. The Federal Reserve buys a government bond worth $1,500,000 from Hubert, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 20%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited (Dollars) 1,500,000 Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars) B B Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately writes a check for the full amount to Clancy. Clancy then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Manuel, who writes a check to Kate, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Poornima. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. First Main Street Bank Second Republic Bank Increase in Checkable Deposits (Dollars) Increase in Required Reserves (Dollars) Increase in Loans (Dollars) ? Third Fidelity Bank 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 in checkable deposits.
e 3. 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%. The Federal Reserve buys a government bond worth $1,500,000 from Hubert, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 20%. Hint: If the change is negative, be sure to enter the value as a negative number. Amount Deposited (Dollars) 1,500,000 Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars) B B Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately writes a check for the full amount to Clancy. Clancy then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Manuel, who writes a check to Kate, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Poornima. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. First Main Street Bank Second Republic Bank Increase in Checkable Deposits (Dollars) Increase in Required Reserves (Dollars) Increase in Loans (Dollars) ? Third Fidelity Bank 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 in checkable deposits.
Chapter14: Banking And The Money Supply
Section: Chapter Questions
Problem 3.4P
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Transcribed Image Text:e
3. 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%. The
Federal Reserve buys a government bond worth $1,500,000 from Hubert, a customer of First Main Street Bank. He deposits the money into his
checking account at First Main Street Bank.
Complete the following table to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans).
Assets
Liabilities
Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 20%.
Hint: If the change is negative, be sure to enter the value as a negative number.
Amount Deposited
(Dollars)
1,500,000
Change in Excess Reserves
(Dollars)
Change in Required Reserves
(Dollars)
Transcribed Image Text:B
B
Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately writes a check for the full amount to Clancy.
Clancy then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new
excess reserves to Manuel, who writes a check to Kate, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out
all of its new excess reserves to Poornima.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.
First Main Street Bank
Second Republic Bank
Increase in Checkable Deposits
(Dollars)
Increase in Required Reserves
(Dollars)
Increase in Loans
(Dollars)
?
Third Fidelity Bank
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
in checkable deposits.
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