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## Suppose First Main Street Bank, Second republic bank, and th

Paper help Economics Suppose First Main Street Bank, Second republic bank, and th

# Suppose First Main Street Bank, Second republic bank, and th

Suppose First Main Street Bank, Second republic bank, and third fedelity bank all have excess reser… Show more Suppose First Main Street Bank, Second republic bank, and third fedelity bank all have excess reserves. The required ratio is 25%. The Federal Reserve buys a government bond worth \$900,000 from Akshay, a client of First Main Street Bank. He deposits the money in his checking account at First Main Street Bank. On 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 (reserves?) by (\$1,800,000/ \$900,000 /\$675,000 or \$225,000). On the Liabilities side First Main Street Bank’s balance sheet, (increases/decreases) Fist Main Street Bank’s (checking account deposits) by (\$225,000/ \$675,000/\$1,800,000/\$900,000). Because the required reserve ratio is 25%, the \$900,000 deposit (increases/decreases) First Main Street Bank’s excess reserves by (\$337,500/\$450,000/\$675,000/\$0), and (decreases/increases) First Main Street Bank’s required reserves by (\$225,000/\$450,000/\$900,000,\$1,125,000) Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately uses the finds to write a check to Darnell. Darnell 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 Patrick, who write a check to Hannah, who deposits the money in her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves as well. Bank (First main bank) (Second main bank) (Third Fidelity) Inc. in checking account Deposits (First main bank) (Second main bank) (Third Fidelity) Increase in Required Reserves (First main bank) (Second main bank) (Third Fidelity) Increase in Loans (First main bank) (Second main bank) (Third Fidelity) Assume this process continues, with each succesive loan deposited in a cjecking account and no banks keeping and excess reserves. Under these assumptions, the \$900,000 injections into the money supply allows banks to make (\$2,700,000/\$3,600,000/\$360,000/\$22,500,â€¦ in new loans of (\$2,700,000/\$3,600,000/\$360,000/\$22,500,â€¦ in checking account deposits. • Show less

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