Complete the following table to show the effect of a new deposit on excess and r
ID: 1166623 • Letter: C
Question
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 5%.
Hint: If the change is negative, be sure to enter the value as negative number.
Now, suppose First Main Street Bank loans out all of its new excess reserves to Dina, who immediately uses the funds to write a check to Charles. Charles 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 Lorenzo, who writes a check to Juanita, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Neha 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.
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $200,000 injection into the money supply results in an overall increase of ___??___ in demand deposits.
Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 200,000 _??_ __??__Explanation / Answer
Amount deposited = $200,000
Required reserve ratio = 5% or 0.05
Change in required reserves = $200,000 * 0.05 = $10,000
Change in excess reserves = $200,000 - $10,000 = $190,000
Following is the complete table -
Table 1
Following is the complete table -
Table 2
Required reserve ratio = 5% or 0.05
Simple money multiplier = 1/rrr = 1/0.05 = 20
Overall increase in demand deposits = Initial increase in demand deposits * Multiplier
Overall increase in demand deposits = $200,000 * 20 = $4,000,000
So,
Under these assumptions, the $200,000 injection into the money supply results in an overall increase of $4,000,000 in demand deposits.
Amount deposited Change in excess reserves Change in required reserves 200,000 190,000 10,000