suppose first main street bank, second republic bank, and third fidelity bank al
ID: 1188124 • Letter: S
Question
suppose first main street bank, second republic bank, and third fidelity bank all have zero excess reserves. The required reserve ratio is 25%. The Federal Reserve buys a government bond worth $1,800,000 from Jack, a client of first main street bank. He deposits the money into his checking account at First Main Street Bank. He deposits the money into his checking account at First Main Street bank.
On the assets side of First Main Street Bank's T-account (before the bank makes any new loans), this [question number 1: increase or decrease?] First Main Street Bank's [ question number 2: reserve, loans, demand deposits, building and furniture, or net worth?] by [question number 3: $1,350,000, $450,000, $3,600,000, or $1,800,000?]. On the liabilities side of First Main Street Bank's T-account, this [question number 4: increase or decrease?] First Main Street Bank's [ question number 5: loans, net worth, reserves, demand deposits, or building and furniture?] by [question number 6: $1,800,000, $3,600,000, $450,000, or $1,350,000?]
Because the required reserve ratio is 25%, the $1,800,000 deposit [question number 7: decrease or increase?] First Main Street Bank's excess reserves by [question number 8: $675,000, $900,000, $1,350,000, or $0?] and [question number 9: increase or decrease?] First Main Street Bank's required reserves by [ question number 10: $1,800,000, $2,225,000, $900,000, or $450,000?]
.
Explanation / Answer
Going in order of how you have to answer:
increases
net worth
900,000
demand deposits
900,000
increases
675,000
increases
225,000
T-table:
First Main Street Bank: (Increase in Demand Dep) = 900,000 (Increase in req reserves)= 225,000
Second Republic Bank: (Increase in Demand Dep) = 675,000 (Increase in req reserves)= 168,750
Third Fidelity Bank: (Increase in Demand Dep) = 506,250 (Increase in req reserves)= 126,562.5
Last two answers:
3,600,000
2,700,000
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