3. The money creation process Suppose First Main Street Bank, Second Republic Ba

Question

3. 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 5%. The Federal Reserve buys a government bond worth $200,000 from Gilberto, 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 Complete the following table to show the effects of the new deposit on excess and required reserves, assuming a required reserve ratio of 5% Hint: If the change is negative, be sure to enter the value as a negative number. Change in Excess Reserves (Dollars) Amount Deposited (Dollars) 200,000 Change in Required Reserves Now, suppose First Main Street Bank loans out all of its new excess reserves to Dina, who immediately writes a check for the full amount to Charles. Charles 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 Lorenzo, who writes a check to Juanita, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Neha.

Explanation / Answer

assume this process continues......................................................................... results in an overall increase of $4000000 in checkable deposits.

Assets amount liabilities Amount reserves 200000 deposits 200000

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