Question
3. Show a T-account for a bank when you make a deposit of $1000 into your checking account. Assume the reserve ratio is 20%.
If the lending process continues as far as it can possibly go, how many deposit dollars will be created from this initial $1000 deposit?
Show a T-account for a bank when you make a deposit of $1000 into your checking account. Assume the reserve ratio is 20%. If the lending process continues as far as it can possibly go, how many deposit dollars will be created from this initial $1000 deposit?
Explanation / Answer
A Bank has a Reserve Ratio (RR) of 20% and an inital deposit of 1,000.00
Calculate the money multiplier and the re-lending process assuming no currency drain
Calculate Money Multiplier (m):
m = 5
Individual Bank Deposit Amount Reserves = Deposit x RR Amount Loaned Out = Deposit - Reserves 1 $1,000.00 1,000.00 x 20% = $200.00 1,000.00 - 200.00 = $800.00 2 $800.00 800.00 x 20% = $160.00 800.00 - 160.00 = $640.00 3 $640.00 640.00 x 20% = $128.00 640.00 - 128.00 = $512.00 4 $512.00 512.00 x 20% = $102.40 512.00 - 102.40 = $409.60 5 $409.60 409.60 x 20% = $81.92 409.60 - 81.92 = $327.68 6 $327.68 327.68 x 20% = $65.54 327.68 - 65.54 = $262.14 7 $262.14 262.14 x 20% = $52.43 262.14 - 52.43 = $209.71 8 $209.71 209.71 x 20% = $41.94 209.71 - 41.94 = $167.77 9 $167.77 167.77 x 20% = $33.55 167.77 - 33.55 = $134.22 10 $134.22 134.22 x 20% = $26.84 134.22 - 26.84 = $107.38 11 $107.38 107.38 x 20% = $21.48 107.38 - 21.48 = $85.90 12 $85.90 85.90 x 20% = $17.18 85.90 - 17.18 = $68.72 13 $68.72 68.72 x 20% = $13.74 68.72 - 13.74 = $54.98 14 $54.98 54.98 x 20% = $11.00 54.98 - 11.00 = $43.98 15 $43.98 43.98 x 20% = $8.80 43.98 - 8.80 = $35.18 16 $35.18 35.18 x 20% = $7.04 35.18 - 7.04 = $28.14 17 $28.14 28.14 x 20% = $5.63 28.14 - 5.63 = $22.51 18 $22.51 22.51 x 20% = $4.50 22.51 - 4.50 = $18.01 19 $18.01 18.01 x 20% = $3.60 18.01 - 3.60 = $14.41 20 $14.41 14.41 x 20% = $2.88 14.41 - 2.88 = $11.53 21 $11.53 11.53 x 20% = $2.31 11.53 - 2.31 = $9.22 22 $9.22 9.22 x 20% = $1.84 9.22 - 1.84 = $7.38 23 $7.38 7.38 x 20% = $1.48 7.38 - 1.48 = $5.90 24 $5.90 5.90 x 20% = $1.18 5.90 - 1.18 = $4.72 25 $4.72 4.72 x 20% = $0.94 4.72 - 0.94 = $3.78 26 $3.78 3.78 x 20% = $0.76 3.78 - 0.76 = $3.02 27 $3.02 3.02 x 20% = $0.60 3.02 - 0.60 = $2.42 28 $2.42 2.42 x 20% = $0.48 2.42 - 0.48 = $1.94 29 $1.94 1.94 x 20% = $0.39 1.94 - 0.39 = $1.55 30 $1.55 1.55 x 20% = $0.31 1.55 - 0.31 = $1.24 31 $1.24 1.24 x 20% = $0.25 1.24 - 0.25 = $0.99 Totals $4,995.03 $999.01 $3,996.02
