3. The money creation process Suppose First Main Street Bank, Second Dominion Ba
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3. The money creation process Suppose First Main Street Bank, Second Dominion Bank, and Third Fidelity Bank choose to keep 20% of all demand deposits as reserves. The Bank of Canada buys a government bond worth $1,500,000 from Carl, a client of First Main Street Bank. He deposits the money into his chequing account at First Main Street Bank On the Assets side of First Main Street Bank's balance sheet (before the bank makes any new loans), this First Main Street Bank's . On the Liabilities and Net Worth side of First Main Street Bank's balance sheet, this First Main Street Bank's Because the reserve ratio is 20%, the $1,500,000 deposit can lend by new loans are made). the amount that First Main Street Bank and First Main Street Bank's reserves by (once all Now, suppose First Main Street Bank loans out the remainder of the deposit after keeping 20% of it for reserves to Crystal, who immediately uses the funds to write a cheque to Manuel. Manuel 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 20% of it for reserves to Patrick, who writes a cheque to Kim, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out the remainder of the deposit after keeping 20% 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. Increase in Increase in Increase in Bank First Main Street Bank Second Dominion Bank Third Fidelity Bank Chequable Deposits Reserves Loans Assume this process continues, with each successive loan deposited into a chequing account. Under these assumptions, the $1,500,000 injection into the money supply allows banks to make resulting in an overall increase of in new loans, in chequable depositsExplanation / Answer
on the assets side of First Main Street Bank's balance sheet, this increase FIrst main street bank's Reserves by $1,500,000 . On the Liabilities and Net workth side of Fisrt main street's balance sheet, this increasefirst main street bank's Deposits by $1,500,000.
Becasue the reserve ratio is 20% , the $1,500,000 deposit increase the amount that first main street bank can lend by $1,20,000 and increase first main street bank's reserves by $300000.
Assume this process continues, with each successive loan deposited into a chequing account. undet these assumptions , the $1,500,000 injection into the money supply allows banks to make $7,500,000 in new loans, ,resulting in an overall increase of $7,500,000
Bank Increase in chequable deposits increse in reserves increase in loans First main street bank 1,500,000 300000 1,200,000 Second Dominion Bank 1,200,000 240000 9,60,000 Thirs Fidelity bank 9,60,000 1,92,000 7,68,000Related Questions
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