Suppose that Bob withdraws $100 of cash from his checking account at Security Bank and uses it to buy a camera from Jor, who deposits the $100 in his checking account in Serenity Bank. Assuming a reserve ratio of 10 percent and no initial excess reserves, determine the extent to which (a) Security banks must reduce its loans and demand deposits because of the cash withdrawal and (b) Serenity Bank can safely increase its loans as demand deposits because of the cash deposit. Have the cash withdrawal and deposit changed the money supply?
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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.
|
Assets |
Liabilities |
||
|
Required Reserves |
$40,000 |
Checkable Deposits |
$200,000 |
|
Excess Reserves |
$25,000 |
||
|
Government Bonds |
$100,000 |
||
|
Loans |
$30,000 |
||
|
Building & Fixtures |
$15,000 |
Owner's Equity |
$10,000 |
1. Calculate the required reserve ratio. (Show your work)
2. Assume that Pam wants to borrow money to pay for a new car from Sharpeland Bank.
A. What is the maximum amount that Sharpeland Bank can loan out if it wants to keep all of its bonds?
B. What is the maximum amount that the banking system can create given the balance sheet above?
3. Assume instead that Michael withdraws $10,000 in cash from his checking account at Sharpeland.
A. By how much will Sharpeland Bank's reserves change based on Michael's withdrawal? (Be specific.)
B. What is the immediate effect of the withdrawal on the M1 measure of the money supply? Explain.
C. As a result of the withdrawal, what is the new value of excess reserves for Sharpeland Bank based on the reserve requirement from part (a)?
