Aa Aa 3. Multiple-deposit expansion of the money supply Suppose First Main Stree

Question

Aa Aa 3. Multiple-deposit expansion of the money supply Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 25%. Carl, a client of First Main Street Bank, suddenly receives $900,000 from a long-forgotten relative. He deposits the money in his checking 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 by . On the Liabilities side First Main Street Bank's of First Main Street Bank's balance sheet, this First Main$1,800,000 $225,000 $900,000 $675,000 by First Main Street Bank's excess Because the required reserve ratio is 25%, the $900,000 deposit reserves by all new loans are made). and First Main Bank's required reserves by (once Now suppose First Main Street Bank lends out all of its new excess reserves to Erin, who immediately uses the funds to write a check to Kevin. Kevin 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 Victor, who writes a check to Juanita, who deposits the money in her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves as well.

Explanation / Answer

a) ON the assets side of first main street bank balance sheet , this INCREASES first main street bank RESERVES by $900000 . on the liabilites, this INCREASE First main street bank DEPOSITS by $900000.

b ) because the required ratio is 25% , the $900000 depsit INCREASES fisrt main street bank excess reserves by $675000 and INCREASE first main banks required reserves by $225000.

c)

D) DEPOSITS in lending, resulting in an overall increase of $3,600,000

bank increase in deposits increase in required reserves increase in loans first street bank 900000 225000 675000 second republic bank 675000 168750 506250 third fidelity bank 506250 126562 379687

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