a. Use a T-account to show the initial effect of this transaction on Bank of Ame
ID: 1251345 • Letter: A
Question
a. Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet.b. Suppose that Bank of America makes the maximum loan they can from the funds you deposited. Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this amount and that the person receiving the check deposits it in Bank of Boston. Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston, after the check has been cleared. On the T-account for Bank of America, include the transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.
Explanation / Answer
1) Bank of America's (Bank A) checking account deposits and reserves rise by $4,000. Bank A Assets Liabilities Reserves +$4,000 Deposits +$4,000 2) Bank of America (Bank A) has to hold $400 of required reserves, leaving $3,600 of excess reserves which they loan. Bank of America increases the checking account of the borrower by $3,600. Bank A Assets Liabilities Reserves +$4,000 Deposits +$4,000 Loans +$3,600 Deposits +$3,600 3) The maximum increase in checking account deposits is $40,000: $4,000 times the simple deposit multiplier of 1/0.10, or 10. Given that the original deposit of $4,000 came from currency, the money supply will increase by $36,000: $40,000 minus $4,000. They are not equal because cash is already counted in original money supply. Note: You will receive full credits for 3) if your answer is that both are “equal” to $40,000. In the class when we talked about the deposit multiplier we usually use money supply to refer to checking account deposits because in the U.S. checking account deposits take a big fraction of total money supply. This may make you think they are equal. But actually the money supply includes both cash and checks. The simple deposit multiplier works only for checking account deposits
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.