Doe on Jul 24 at n59 PM EDr Suppose First Main Street Bank, Second Dominion Bank

Question

Doe on Jul 24 at n59 PM EDr Suppose First Main Street Bank, Second Dominion Bank, and Third Rdelity 3ank choose to keep 25% of all demand deposits as reserves. Albert, a clent of First Main Street Bank, suddenly recelves $900,000 from a long-forgottern relative. He deposits the money in his chequing account at First Main Street Bank. On the Assets side of First Main Street Bank's balance sheet (before the bank makes any new loans), this First Main Street Bank's of First Main Street Bank's balance sheet, this by . On the Llabilities side First Main Street Bank's by Because the reserve ratio is 25%, the $900,000 deposit lend by are made), the amount that First Main Street Bank can and First Main Bank's reserves by (once all new loans Now suppose First Main Street Bank lends out the remainder of the deposit after keeping 25% of it for reserves to Eileen, who immediately uses the funds to write a cheque to Jim. Jim deposits the funds immediately into his chequing account at Second Dominion Bank. Then Second Dominion Bank lends out the remainder of the deposit after keeping 25% of it for reserves to Dmitri, who writes a cheque to Karen, who deposits the money in her account at Third Fidelity Bank. Third Fidelity lends out the remainder of the deposit after keeping 25% of it for reserves as well. Fill in the following table to show the effect of this ongoing chain of events at each of the banks. Enter each answer to the nearest penny. You should have calculated the figures for the first row earlier in this problem.

Explanation / Answer

increases
reserves by $900,000
increases
liability by $900,000

Because the required reserve ratio is 25%, the $900,000 deposit increases the amount that First Main Street Banks can lend by 675000 and increases First Main Banks required reserves by $225,000.

Increase in Increase in Increase in
Demand Deposits Required Reserves Loans
First Main Street Bank $900,000.00 $225,000.00 $675,000.00 Second RepublicBank $675,000.00 $506,250.00 $168,750.00 Third Fidelity Bank $168,750.00 $126562.50 $42,187.50

675,000
3600000 $900,000 x (1 / 0.25)

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