Question

7. The money creation process

Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at
25%. Dmitri, a Southeast Mutual Bank customer, deposits $1,800,000 into his checking account at the local branch.
Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).
Assets
Liabilities

Answer 1

When a bank receives a deposit, it adds the amount to its liabilities column under 'Deposits' and to its assets column under 'Reserves.'

In this case, Southeast Mutual Bank's T-account would reflect an increase in both assets and liabilities due to Dmitri's $1,800,000 deposit.

Step-by-step explanation:

The money creation process starts with a bank receiving a deposit. In this case, Southeast Mutual Bank has a customer named Dmitri who deposits $1,800,000 into his checking account at the local branch.

When the bank receives a deposit, it adds the deposit amount to its liabilities column under 'Deposits.'

At the same time, it adds the same amount to its assets column under 'Reserves,' since it now has more money on hand.

So, in this case, Southeast Mutual Bank's T-account would reflect the following changes:

Assets:

• Reserves: + $1,800,000

Liabilities:

• Deposits: + $1,800,000