Question

7. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. Gilberto, a client of First Main Street Bank, deposits $200,000 into his checking account at First Main Street Bank Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). Assets Labilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 5% Hint: If the change is negative, be sure to enter the value as negative number Amount Deposited (Dollars) 200,000 Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars)

Answer 1

Answer:

Assets		Liabilities
Reserves	$200,000	Deposits	$200,000

Amount Deposited	Change in Excess Reserves	Change in Required Reserves
$200,000	$190,000 (95% of deposits) = 95% of 200,000	$10,000 (5% of deposits) = 5% of 200,000

	Increase in Deposits	Increase in Required Reserves	Increase in Loans
First main Street bank	$200,000	$10,000	$190,000
Second Republic Bank	$190,000	$9,500	$180,500
Third Fidelity bank	$180,500	$9,025	$171,475

If he process continues then,

Total Increase in deposits = (1 / required reserve ratio) * Initial deposit

= (1 / 0.05) * $200,000

= $4,000,000