On the Assets side of First Main Street Bank\'s T-account (beofre the bank makes
ID: 1095029 • Letter: O
Question
On the Assets side of First Main Street Bank's T-account (beofre the bank makes any new loans), this [decreases/increaces] First Main Street Bank's [building and furniture/reserves/net worth/loans/demand deposits] by [$500,000/$225,000/$25,000/$250,000]. On the Liabilities side of First Main Street Bank's T-account, this [increases/decreases] First main Street Bank's [building and furniture/reserves/net worth/loans/demand deposits] by [$500,000/$225,000/$25,000/$250,000].
becase the reserve ration is 10%, the $250,000 deposit [decreases/increases] the amount that First Main Street Bank can lend by [$125,000/$200,000/$0/$225,000] and [increases/decreases] First Main Street Bank's reserves by [$25,000/$125,000/$250,000/$50,000]
Assume this process continues, with each successive loan deposied into a chequing account. Under these assumptions the $250,000 injection into the money supply allows banks to make [$250,000/$2,500,000/$1,250,000/$2,250,000] resulting in an overall increase of [$225,000/$2,500,000/$1,250,000/$2,250,000] in demand deposits.
Suppose First Main Street Bank, Second Dominion Bank, and Third Fidelity Bank choose to keep 10% of all demand deposits as reserves. The Bank of Canada buys a government bond worth $250,000 from Carl, a client of First Main Street Bank. He deposits the money into his chequing account at First Main Street Bank. Now, suppose First Main Street Bank loans out the remainder of the deposit after keeping 10% of it for reserves to Becky, who immediately uses the funds to write a cheque to Larry. Larry deposits the funds immediately into his chequing account at Second Dominion Bank. Then Second Dominion Bank lends out the remainder of the deposit after keeping 10% of it for reserves to Steve, who writes a cheque to Hannah, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out the remainder of the deposit after keeping 10% of it for reserves as well. Fill in the following table to show the effect of this ongoing chain of events at each of the banks. Enter each answer to the nearest penny.Explanation / Answer
On the assets side of First Main Street Bank's T-account (before the bank makes any new loans), this increases First Main Street Bank's reserves by $250,000. On the liabilities side of First Main Street Bank's T-account, this increases First Main Street Bank's demand deposits by $1,800,000.
Because the required reserve ratio is 25%, the $250,000 deposit increases First Main Street Bank's excess reserves by $225,000 and increases First Main Street Bank's required reserves by $25,000.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.