Please double confirm all the answers and fill in the table! 5. The money creati
ID: 1142983 • Letter: P
Question
Please double confirm all the answers and fill in the table! 5. The money creation process Aa Aa Imagine High Street Bank, Second Commonwealth Bank, and Third Fidelity Bank choose to keep 5% of all current deposits as reserves. The central bank of the fictional country of Banuatu buys a government bond worth $100,000 from Carlos, a client of High Street Bank. He deposits the money into his current account at High Street Bank. On the Assets side of High Street Bank's T-account (before the bank makes any new loans), this increases High Street Bank's High Street Bank's T-account, this increases High Street Bank's current depositsby reserves by $100,000On the Liabilities and Owners' Equity side of $100,000 Because the reserve ratio is 5%, the $100,000 deposit increases the amount that High Street Bank can lend by$95,000 and increases High Street Bank's reserves by $5,000 Conce all new loans are made). Now, imagine High Street Bank loans out the remainder of the deposit after keeping 5% of it for reserves to Madeline, who immediately uses the funds to write a cheque to Jonas. Jonas deposits the funds immediately into his current account at Second Commonwealth Bank. Then Second Commonwealth Bank lends out the remainder of the deposit after keeping 5% of it for reserves to Zach, who writes a cheque to Caroline, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out the remainder of the deposit after keeping 5% 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. Increase in Increase in Increase in Loans Bank High Street Bank Second Commonwealth BankL Third Fidelity Bank Current Deposits Reserves Assume this process continues, with each successive loan deposited in a current account. Under these assumptions the initial $100,000 deposit leads to an additional$2,000,000 in current deposits, causing the money supply to increase by a total of ll $2,000,000 (including the initial deposit).Explanation / Answer
Some changes are advised:
Because the reserve ratio is 5%,the $1,00,000 deposit increases the amount that High Street bank can lend by $95,000 and reduces High Street Bank's reserves by $95,000. (once the new lones are made)
The table can be made as:
Increase in Current Deposits Increase in Reserves Increase in Loans High Street Bank 100000 5000 95000 Second commonwealth Bank 95000 4750 90250 Third Fidelity Bank 90250 4512.5 85737.5 Total 285250 14262.5 270987.5 Hence the last two blanks would be $ 285250-$100000=$185250 &$100000 (change in money supply is the initial receipt only by the company when it issued bond.