1. Bank of Beacon Hill has total reserves of $40 million and current total checking account deposits of $200 million. With a legal reserve requirement of 10% of total checking accounts, what are the bank's legal reserves and excess reserves? If the bank creates a new loan in the form of a new checking account equal to its excess reserves and each check is deposited in another commercial bank, what can the banking system do in total maximum new checking accounts (loans), given the simple bank deposit multiplier?
2. If banks desire to retain excess reserves of 10% of total checking accounts and borrowers hold 10% of their new checking accounts (loans) for liquidity purposes and do not spend that 10%, what will be the maximum impact on the money supply in the form of new checking accounts?
1. Bank of Beacon Hill has total reserves of $40 million and current total checking account deposits of $200 million. With a legal reserve requirement of 10% of total checking accounts, what are the bank's legal reserves and excess reserves? If the bank creates a new loan in the form of a new checking account equal to its excess reserves and each check is deposited in another commercial bank, what can the banking system do in total maximum new checking accounts (loans), given the simple bank deposit multiplier?
2. If banks desire to retain excess reserves of 10% of total checking accounts and borrowers hold 10% of their new checking accounts (loans) for liquidity purposes and do not spend that 10%, what will be the maximum impact on the money supply in the form of new checking accounts?
Related textbook solutions
Related questions
1) Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit,
a) Bank A's reserves immediately increased by $______.
b) Bank A's required reserves increased by $______.
c) Bank A's excess reserves increased by $______.
d) Bank A can make a maximum new loan of $______.
e) Checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of $______.
| Assets | Liabilities |
| Reserves +$4000 | Deposits +$4000 |
2) Refer to the table above. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of $______.
3) Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of $______.
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 Raphael, 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 Bank's 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 | Change in Excess Reserves | Change in Required Reserves |
|---|---|---|
| (Dollars) | (Dollars) | (Dollars) |
| 250,000 |
Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately uses the funds to write a check to Larry. Larry 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 Raphael, who writes a check to Susan, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Becky as well.
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 $250,000 injection into the money supply results in an overall increase of in demand deposits.
The money supply expansion process
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 $750,000 from Raphael, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.
Complete the following to reflect any changes in First Main Street Bank's balance sheet (before the bank makes any new loans).
a) The Assets side of First Main Street Bank's balance sheet (before the bank makes any new loans), this (increases/decreases) First Main Street Bank's (building and furniture/net worth/checkable deposits/reserves/loans) by ($150,000/$600,000/$750,000/$1,800,000). On the Liabilities side, First Main Street Bank's balance sheet, (increases/decreases) First Main Street Bank's (building and furniture/net worth/checkable deposits/reserves/loans) by ($150,000/$600,000/$750,000/$1,800,000).
b) Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.
Hint: If the change is negative, be sure to enter the value as a negative number.
| Amount Deposited | Change in Excess Reserves | Change in Required Reserves |
|---|---|---|
| (Dollars) | (Dollars) | (Dollars) |
| 750,000 |
c) Now, suppose First Main Street Bank loans out all of its new excess reserves to Megan, who immediately writes a check for the full amount to Larry. Larry then immediately deposits the funds in his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Raphael, who writes a check to Susan, who deposits the money in her account at Third Fidelity Bank. Finally, Third Fidelity lends out all of its new excess reserves to Becky.
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 Checkable Deposits | Increase in Required Reserves | Increase in Loans | |
|---|---|---|---|
| (Dollars) | (Dollars) | (Dollars) | |
| First Main Street Bank | |||
| Second Republic Bank | |||
| Third Fidelity Bank |
d) Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $750,000 injection into the money supply results in an overall increase of ($370,000/$3,000,000/$3,750,000) in checkable deposits.
