Deposits that results from the initial change in reserves

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Reference no: EM13976368

1. Assume that the Fed purchases a security for $75,000 from FirstBank. Also assume that the reserve ratio is 0.2 (20%).

First Bank lends its excess reserves to Betty, who does her banking at Second Bank.

Second Bank lends its excess reserves to Charlie, who does his banking at Third Bank.

Third Bank lends its excess reserves to Donna, who does her banking at Fourth Bank.

Assume a simple money creation model, with no cash drain, no time deposits, and banks desire to hold no excess reserves.

Question: How does the open market purchase affect the T-accounts for FirstBank, SecondBank and Third Bank? What is the total increase in deposits that results from the initial change in reserves?

Reference no: EM13976368

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