Reference no: EM13496285

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. The Federal Reserve buys a government bond worth $200,000 from Carlos, a client of First Main Street Bank. He deposits the money Into his checking account at First Main Street Bank.

On the Assets side of First Main Street Bank's T-account (before the bank makes any new loans), this

increases    First Main Street Bank's              reserves    by  $200,000    . On the Liabilities side of

First Main Street Bank's T-account, this       Increases    First Main Street Bank's        demand deposits                                           by

$200,000.

Because the required reserve ratio is 5%, the $200,000 deposit       Increases        First Main Street Bank's excess

reserves by $190,000      and decreases       First Main Street Bank's required reserves by $200,000                      .

Now, suppose First Main Street Bank loans out all of its new excess reserves to Kristen, who immediately uses the funds to write a check to ]aural. lama! 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 Rajiv, who writes a check to Hilary, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess 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.

Assume this process continues, with each successive loan deposited in a checking account and no banks keeping any excess reserves. Under these assumptions, the $200,000 Injection Into the money supply allows banks to make _________________ in new loans, resulting in an overall increase of________________ in demand deposits.