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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%. The Federal Reserve buys a government bond worth $250,000 from Alex, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Banks T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number Amount Deposited (Dollars) 250,000 Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars)Amount Deposited (Dollars) 250,000 Change in Excess Reserves (Dollars) Change in Required Reserves (Dollars) Now, suppose First Main Street Bank loans out all of its new excess reserves to Susan, who immediately uses the funds to write a check to Raphael Raphael 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 Clancy, who writes a check to Becky, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Eileen 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 (Dollars) Increase in Required Reserves (Dollars) Increase in Loans (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 $250,000 injection into the money supply results in an overall increase of in demand deposits

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Ads hiabilithe Depont5000o a50000 25000 Fist Ban 250D00500 5000225000The $250000 injection would result in an increase of 250000x(1/0.10) = 250000x10 = 2500000 in demand deposits.

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