Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank al

Question

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $1,500,000 from Carl, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. On the Assets side of First Main Street Bank's T-account (before the bank makes any new loans), this First Main Street Bank's by . On the Liabilities side of First Main Street Bank's T-account, this First Main Street Bank's by Because the required reserve ratio is 20%, the $1,500,000 deposit First Main Street Bank's excess reserves by and First Main Street Bank's required reserves by Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately uses the funds to write a check to Nick. Nick 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 Stelios, who writes a check to Kate, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves as 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. Assume this process continues, with each successive loan deposited in a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply allows banks to make in new loans, resulting in an overall increase of in demand deposits.

Explanation / Answer

1) increases ; assets ; $1,500,000 increases ; liabilities ; $1,500,000 2)increases ; $1,200,000 increases;$1,200,000 3)

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