Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero… 1 answer below »
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 10%. The Federal Reserve buys a government bond worth $250,000 from Nick, 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 | ||
| Reserves | $250,000 | Checkable Deposits | $250,000 |
Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 10%.Hint: If the change is negative, be sure to enter the value as a 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 Latasha, who immediately writes a check for the full amount to Jake. Jake 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 Tim, who writes a check to Rosa, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Alyssa.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 Checkable 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 checkable deposits.
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