Question

I am unsure if the first part of the answered question is correct, can you please explain how I can go about answering this

7. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10% . Edison, a client of First Main Street Bank, deposits $500,000 into his checking account at First Main Street Bank. loans) Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new Liabilities Assets $500,000 $500,000 Reserves Deposits Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. negative number. Hint: If the change is negative, be sure to enter the value as Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 450,000 50,000 500,000 uses the funds to write a check to Brian. Now, suppose First Main Street Bank loans out all of its new excess reserves to Crystal, who immediately Brian 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 Kevin, who writes a check to Hilary, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Maria in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (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 an overall increase of in demand deposits.

Answer 1

Solution

Money Creation

Money creation or credit Creation is the process by which the money supply of a country is increased .it is the process where in the banks lend out the excess reserve to create checkable deposits.

In the initial condition where the first Main street bank has Zero deposits and Manuel deposits $500,000 into his checking account account with the first Main street Bank, the banks T account Will be as follows:

Table 1 :

The checking deposits made by the clients are liabilities for the bank, which has to be repaid to the client at a future time.the assets of a bank include the reserves (required reserve and excess reserve).

Liabilities Assets $500,000 $500,000 Deposits Reserves

The required reserve ratio is given 10%; therefore the excess reserve ratio will be 90%.

Amount deposited	Change in excess reserves	Change in required reserve
$500,000	$500,000*0.90=$4,50,000	$500,000*0.10=$50,000

Effects of ongoing chain of events at each bank:

Table 3:

	Increse in deposits	Increase in required reserve	Increase in loss
First Main street Bank	$500,000	$50,000	$4,50,000
Second Republic Bank	$4,50,000	$45,000($450,000*10/1000	$40,5000($450,000*90/100)
Third fidelity bank	$405,000	$40,500($405,000*10/100)	$364,500($405,000*90/100)

The total increase in demand deposit can be calculated as follows:

Total increase in demand deposit = Initail deposit/Required reserve ratio

= $500,000/0.1

= $ 5000,000

Therefore, the $ 500,000 injection into the money supply in an overall in an overall increase of $5000,000 in demand deposits.