Question

Unit 5 Assignment Back to Attempts: Keep the Highest: 14 6. 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% Raphael, 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). Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserverado 15 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

Solution:-

The following balance sheet is showing the initial balance sheet before the bank makes any loans

Assets		Liabilities
Particular	Amount	Particular	Amount
Reserve	200,000	Deposit	200,000

The required reserve ratio is given as 5%; therefore the excess reserve ratio will be 95%.

Amount Deposited	Change in Excess Reserve	Change in Required Reserve
$200,000	$200,000 * 95 / 100 = $ 1,90,000	$200,000 * 5 / 100 = 10,000

The following Table is showing the changes at all banks:-

Bank	Increase in Deposit	Increase in Required Reserve	Increase in Loan
First Main Street Bank	$200,000	$200,000 * 5 / 100 = 10,000	$1,90,000
Second Main Street Bank	$1,90,000	$1,90,000 * 5 / 100 = 9500	$1,80,500
Third Main Street Bank	$1,80,500	$1,80,500 * 5 / 100 = 9025	$1,71,475

Deposit Multiplier = 1 / RR
= 1 / 0.05
= 20

Overall Increase in Deposit = $200,000 *20
= $40,00,000