Question

Table 1 shows the financial position of Bank Uno once $ 4691.00 has been deposited.

Assume that the required reserve ratio is 7.00 %, that banks do not keep excess reserves, and that all the money loaned out from Bank Uno is deposited into Bank Duo (whose loans go to other banks not shown here).

Once the lending and depositing process is complete, what will the accounts look like in Tables 2 and 3? Specify all answers to two decimal places.

What are Bank Uno's deposits in Table 2?
$___________
What are Bank Uno's reserves in Table 2?
$___________
What are Bank Duo's loans in Table 3?
$___________
What are Bank Uno's loans in Table 2?
$___________

Answer 1

What are Bank Uno's deposits in Table 2? - $4691 (deposits)

What are Bank Uno's reserves in Table 2? - $328.37 (4691 x 7%)

What are Bank Duo's loans in Table 3? - $4057.25 (4362.85 x 93%)

What are Bank Uno's loans in Table 2? - $4362.85 (4691 - 328.37)

Loans made by a bank do not affect the money that the bank owes to its depositors (the liabilities side of the T‑account), so its deposits in Table 2 remains $4691.00. Assuming that banks do not keep any excess reserves, Bank Uno will only keep 7.00% of its deposits and loan out 93.00%. This means it keeps reserves of $328.37 and makes loans of the remaining $4362.63 .

When the $4362.63 gets deposited into Bank Duo, the bank similarly keeps 7.00 % and loans the remaining $4057.25 . Note that each of these series of deposits and loans increases the money supply by a smaller and smaller amount. Eventually, when this process completes, the money supply will be increased by a factor of 14.29 (assuming that all loans get redeposited and no bank keeps more than the minimum reserves; otherwise, it will increase by a smaller factor). How is this money multiplier calculated?

money multiplier = 1 / required reserve ratio = 1 / 7.00% = 14.29