Question 1 The following tables report the balance sheet of a commercial bank. A

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Question 1 The following tables report the balance sheet of a commercial bank. Assume that (1) all currency is deposited into bank accounts (2) the required reserve ratio is 15% and banks don't hold excess reserves (3) there is only one commercial bank in town Suppose that John deposits $3,000 into his bank account. Using the next three tables, show the process of money creation by completing all cells. Step 1 Assets Liabilities Deposits: $3,000 Reserves: S Loans: S M1-S Step 2: Assets Liabilities Deposits: S Reserves: S Loans: S M1- S

Explanation / Answer

Step -1 => Reserves = 450

loans = 2550

M1 = $ 5550

because = required reserves = 3000 * 15/100 = 450

loans = deposits - required reserves = 3000 -450 = 2550

step -2 = > Deposits = 2550

reserves = 382.5

loans = 2167.5

M1= $7715.5

Step -3 => Deposits = 2167.5

reserves = 325.125

loans = 1842.375

M1=$9557.875

at the ends M1 equals to $ 20000

because money multiplier = 1/0.15 =

moeny supply = 3000 *6.667 = 20000

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