I do not want to get any pictures i want to copy the answer. There is a one-seve

Question

I do not want to get any pictures i want to copy the answer.

There is a one-seventh (1/7) reserve requirement. If the fed wants to create money they first buy a $1,400,000 bond from a bank (Bank A). Bank A's reserves increase and its holding of bonds decreases. But Bank A does not want unproductive assets so they loan the money to a home buyer. The home buyer pays the builder who deposits the money into an account at Bank B. Bank B uses the new deposits to make an auto loan to a company. They lend the most that they have legally available. How much money did then lend? Show your answer in dollars with no commas and no dollar symbol. For example: if your answer is $1,234 then you should enter "1234") NB: Write down all of this information. You will need it to answer subsequent questions. Be sure to write down your calculations because you will be asked to show your work in the next question.

Explanation / Answer

First the FED buy bonds of 1400000 from BAnk A,

It means now Bank A reserves increases and bonds decrease by 1400000

And Bank A loan this money to a home buyer.

Home buyer pays it to the builder who deposits this amount of 1400000 into bank B.

Due to this new deposit in Bank B, the checakable deposit of bank B increased by 1400000.

So now required reserves of Bank B will increase by 1400000* 1/7 = 200000.

It is so because the reserve requirement is 1/7 ( given)

And banks have to keep a reserves of reserve required ratio of checkable deposit.

Bank B's checkable deposit increase so its reserve requirement also increase by 1/7th of 1400000 = 200000.

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