Suppose you deposit $4,000 in currency into your checking accountat
Bank of America. Assume that Bank of America has no excess reservesat the time you
make your deposit and that the required reserve ratio is 10percent.
a. Use a T-account to show the initial effect of this transactionon Bank of America's
balance sheet.
b. Suppose that Bank of America makes the maximum loan they canfrom the funds you
deposited. Use a T-account to show the initial effect on Bank ofAmerica's balance sheet
from granting the loan. Also include in this T-account thetransaction from question (a.).
c. Now suppose that whoever took out the loan in question (b)writes a check for this
amount and that the person receiving the check deposits it in Bankof Boston. Show the
effect of these transactions on the balance sheet of Bank ofAmerica and Bank of Boston,
after the check has been cleared. On the T-account for Bank ofAmerica, include the
transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits thatcan result from your
$4,000 deposit? What is the maximum increase in the money supply?Explain.
Bank of America. Assume that Bank of America has no excess reservesat the time you
make your deposit and that the required reserve ratio is 10percent.
a. Use a T-account to show the initial effect of this transactionon Bank of America's
balance sheet.
b. Suppose that Bank of America makes the maximum loan they canfrom the funds you
deposited. Use a T-account to show the initial effect on Bank ofAmerica's balance sheet
from granting the loan. Also include in this T-account thetransaction from question (a.).
c. Now suppose that whoever took out the loan in question (b)writes a check for this
amount and that the person receiving the check deposits it in Bankof Boston. Show the
effect of these transactions on the balance sheet of Bank ofAmerica and Bank of Boston,
after the check has been cleared. On the T-account for Bank ofAmerica, include the
transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits thatcan result from your
$4,000 deposit? What is the maximum increase in the money supply?Explain.
Related textbook solutions
Related questions
Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. The Federal Reserve buys a government bond worth $250,000 from Raphael, a client 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 T-account (before the bank makes any new loans).
| Assets | Liabilities | ||
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.
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) |
| 250,000 |
Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately uses the funds to write a check to Larry. Larry deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Raphael, who writes a check to Susan, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Becky as well.
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.
| Increase in Deposits | Increase in Required Reserves | Increase in Loans | |
|---|---|---|---|
| (Dollars) | (Dollars) | (Dollars) | |
| First Main Street Bank | |||
| Second Republic Bank | |||
| 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 $250,000 injection into the money supply results in an overall increase of in demand deposits.
