7. The Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity

Question

7. The Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. Federal Reserve buys a govemment bond worth account at First Main Street Bank Bank all have zero excess reserves. The required reserve ratio is S%. The buys a govenment bond worth $200,0o trom Tim, a oustomer of First Main Street Bank. He deposts the money into his checking Complete the following tabie to reffect any changes in Firnst Main Street Bank's balance sheet (efore the bank makes any new loans). Assets Liabilises Complete the following table to show the effects of the new deposit on excess and requsired reserves, assuming a requaired reserve ratio 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) (Dollara) 200,000 Now, suppose First Main Street Bank lends out all of its new excess reserves to Rosa, who immediately writes a check for the full amount to then mmediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess eserves to Brian, who wites a check to Alyssa, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Crystal Fil in the foilowing table to show the effect of this angoing chain of events at each bank Enter each answer to the nearest doniar Increase in Checkable Deposits Increase in Required Reserves Increase in Loans Second Republic Bank Third Fidelity Dank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $200,000 injection into the money supely results in an overall increase of in checkable deposits

Explanation / Answer

1. Assets: Reserves $200,000 and Liabilities: Deposits $200,000

2. Total amount deposited = $200,000

Required reserves = 5% of $200,000 = $10,000

Excess reserve = 200,000 - 10,000 = $190,000

3.

First bank: Shown above

Second bank:

Total amount deposited = $190,000

Required reserves = 5% of $190,000 = $9,500

Excess reserves = 190,000 - 9,500 = $180,500

Third bank:

Total amount deposited = $180,500

Required reserves = 5% of $180,500 = $9,025

Excess reserves = 180,500 - 9,025 = $171,475

4. Money multiplier = 1/rr = 1/0.05 = 20

Increase in deposits = 20*$200,000 =$4,000,000

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