The money creation process Suppose First Main Street Bank, Second Republic Bank,

Question

The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve-deposit ratio is 25%. Jake, a client of First Main Street Bank, suddenly receives $1,800, 000 from a long-forgotten relative. He deposits the money in his checking account at First Main Street Bank. Because the required reserve-deposit ratio is 25%, the $1,800, 000 deposit_______First Main Street Bank's required reserves by_____and, therefore._____First Main Street Bank's excess reserves by______. Now suppose First Main Street Bank loans out all of its new excess reserves to Erin, who immediately uses the funds to write a check to Jason, Jason deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Robert, who writes a check to Ginny, who deposits the money in her account at Third Fidelity Bank. Third Fidelity lends out all its excess reserves as well. Fill In the following table to show the effect of this ongoing chain of events at each of the banks. Enter each answer to the nearest penny. Assume this process continues, with each successive loan being deposited in a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,800, 000 injection into the banking system allows banks to make______in new loans, resulting in an overall increase of_______in demand deposits.

Explanation / Answer

Increases

1800000*25% = $450000

Increases

$1800000 - $450000 = $135000

Bank

Increase in demand deposit

Increase in required reserve

Increase in excess reserve

First main street bank

$1800000

1800000*25% = $450000

1800000 – 450000 =$1350000

Second Republic bank

$1350000

1350000*25% = $337500

1350000 – 337500 = $1012500

Third Fidelity bank

$1012500

1012500*25% = $253125

=1012500 – 253125 = $759375

Overall increase in money supply = $1800000*(1/25%) = $7200000

Bank

Increase in demand deposit

Increase in required reserve

Increase in excess reserve

First main street bank

$1800000

1800000*25% = $450000

1800000 – 450000 =$1350000

Second Republic bank

$1350000

1350000*25% = $337500

1350000 – 337500 = $1012500

Third Fidelity bank

$1012500

1012500*25% = $253125

=1012500 – 253125 = $759375

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