Question

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. The Federal Reserve buys a government bond worth $500,000 from Eric, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.The following table reflects any changes in First Main Street Bank's balance sheet (before the bank makes any new loans):Assets LiabilitiesLoans $500,000 Checkable Deposits $500,000The following table shows the effects of new deposit on excess and required reserves, assuming a required reserve ratio is 10%.Hint: If the change is negative, be sure to enter the value as a negative number.Amount Deposited (Dollars) Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars)500,000 450,000 50,000Now, suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately writes a check for the full amount to Bob. Bob then immediately deposits the funds into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Kenji, who writes a check to Ginny, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Lucia.Fill in the following table to show the effect of this ongoing chain of events at each banks. Enter each answer to the nearest dollar.Bank Increase in Checkable Deposits (Dollars) Increase in Required Reserves (Dollars) Increase in Loans (Dollars)First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in overall increase of ......................... in checkable deposits.

Answer 1

Under these assumptions, the $500,000 injection into the money supply results in overall increase of 5,000,000 in checkable deposits.

Step-by-step explanation:

Multiplier × Money supply

= 1 / 0.10 × 500,000

⇒ 5,000,000

First Main Street Bank

Increase in Checkable Deposits: 500,000

Increase in Required Reserves: 50,000

Increase in Loans: 450,000

Second Republic Bank

Increase in Checkable Deposits: 450,000

Increase in Required Reserves: 45,000

Increase in Loans: 405,000

Third Fidelity Bank

Increase in Checkable Deposits: 405,000

Increase in Required Reserves: 40,500

Increase in Loans: 364,500