The Monetary System 7

# The Monetary System 7 - 7 The money creann pm Suppcae First...

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Unformatted text preview: 7. The money creaﬁnn pm Suppcae First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zere exoeai raerva. The required raerve ratio is 10%. The Federal Reserve buys a govemment bond worth \$250,000 ﬁ'orn Andrew, a client of First Main Street Bank. He deposits the mone'lcr into his checking account at First Main Street Bank. Complete the faikmmg table to reﬂect any changes in First Marin Street Bank's T—acmunt (before the tank makes any new bans). Asset: Lilhilies Reserves 1" 5250.000 1' Deposits 1' \$250,000 a! Cornﬂfetethefaikamgtabietashawtheeﬁ'ectafanewdepasitan excessandrequﬂredreserves when therewﬂredreserveratmis 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposilaed Change in Excess Reserves Change in Required Reserves (Dollars) ( Dollars ) ( Dollars ) 250,000 225,000 V’ 25,000 V’ Explanation: “Pointy—1,11 Close Explanation A Because the required reserve ratio is 10%, First Main Street Bank is required to hold 10% of its fresh reserves {that is, the initial deposit). Since 10% of \$250,000 is \$25,000, this means that First Main Street Bank's required reserve has increased by \$25,000. The remaining 90% of the fresh reserves, or \$225,000, is excess reserves and can be used to make loans. Now, suppose First Main Street Bank loans out all of its new excess reserves to Teresa, who immediately uses the funds to write a check to Sam. Sam deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Darnell, who writes a check to Beth, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Eleanor in turn. Flll ln the followlng table to show the effect of th ls ongolng chaln of events at each bank. Enter each answer to the nearest dollar. Increase in Deposils Increase in Required Reserves Increase in Loans {Dollars} (Dollars) (Dollars) First Main street Bank 250,000 J EJ 225,000 J Second Republic Bank 225,000 v’ Eli 202,500 v’ Third Fidelity Bank 202,500 v’ E]! 182,250 v’ ﬁPoints:_1,!1 Assume this prooas continua, with each suooasive loan deposited into a checking account and no hanks keeping any exoas merws. Under thae msumptions, the \$250,000 injection into the money supply results in an oveiall increase of \$2,500,000 9' in demand deposits. ...
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• Spring '09
• NERVO
• Monetary Policy, Federal Reserve System, Fractional-reserve banking, Main Street Bank, First Main Street Bank, ECON-2301

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