Question

You want to remodel your kitchen and the builder estimates it will cost $50,000. You start with $15,000 in your bank account. You get a loan from a commercial bank for $45,000 and they deposit the $45,000 into your account so that your total balance is now $60,000. You write a check to the builder for $50,000 and so have $10,000 left over for your other expenses. The builder then deposits the $50,000 into their bank account and remodels your kitchen. a. Show the changes this causes on the three main balance sheets of the economy. Be sure to write both the account name and the dollar amount increased or decreased. If there is no change for a particular part, write "No Change" Assets: Liabilities: The Federal Reserve System Bank Account: $10,000 Commercial Bank Loan: 45,000 Commercial Banks LOANS $45,000 DEPOSITS (YOUR ACCOUNT) $10,000 Households & Firms Cash $50,000 b.

How much has the total money supply of the economy changed because of your kitchen loan? That is, how much has M2 increased or decreased due to your kitchen loan?

Answer 1

The changes in the three main balance sheets due to the kitchen loan are listed. The total money supply of the economy has increased by $45,000.

Step-by-step explanation:

The changes in the three main balance sheets of the economy due to the kitchen loan are as follows:

• Assets: There is an increase of $45,000 in Commercial Bank Deposits and a decrease of $45,000 in Federal Reserve System Bank Account.
• Liabilities: There is an increase of $45,000 in Commercial Bank Loans and no change in Commercial Bank Deposits.

The total money supply of the economy, specifically M2, has increased by $45,000 due to the kitchen loan.