Question

You deposit $3,000 in currency into your checking account at Elmo's Bank, which has no excess...

You deposit $3,000 in currency into your checking account at Elmo's Bank, which has no excess reserves. The required reserve ratio is 20%.

a. Use a T-account to show the initial effect of this transaction on Elmo's Bank balance sheet.

b. Suppose Elmo's Bank makes the maximum loan it can from the funds you deposited. Use a T-account to show the initial effect of granting the loan on Elmo's Bank balance sheet.

c. What is the maximum increase in checking account deposits that can result from your deposit? What is the maximum increase in the money supply? Briefly explain.

Homework Answers

Answer #1

Part A

Elmo's Bank
Assets Liabilities
Reserves +$3000 Deposits +$3000

Part B

Elmo's Bank
Assets liabilities
Reserves +$3000 Deposits $+3000
Loans +$2400 Deposits $+2400

Deposit = 3000-(3000*20% reserve ratio) =2400

Part C

maximum increase in checking account deposits = deposit * 1/reserve ratio = 3000*1/0.20 = $15000

maximum increase in the money supply= maximum increase in checking account deposits - original deposit = 15000-3000 = $12000

Maximum increase in checking account deposits and maximum increase in the money supply are not same as the cash is already considered in original money supply.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that you deposit $2000 in currency into your checking account at the branch of a...
Suppose that you deposit $2000 in currency into your checking account at the branch of a bank, which is assumed to have no excess reserves at the time you make your deposit. Also assume that the reserve requirement ratio is 20%. a) Show the initial impact of this transaction on the bank’s T-account: b) Suppose the bank makes the maximum loan it can from the funds you deposited. How does the T-account change? c) What is the maximum increase in...
Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and...
Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. If the required reserve ratio is 10​ percent, an increase in bank reserves of​ $1,000 can support an increase in checking account deposits​(including the original​ deposit) in the banking system as a whole of up to A. ​$100. B. ​$10,000. C. ​$1,000. D. ​$100,000.
Imagine that Bellatrix deposits $10,000 of currency into her checking account deposit at Gringotts Wizarding Bank...
Imagine that Bellatrix deposits $10,000 of currency into her checking account deposit at Gringotts Wizarding Bank (commercial bank in Hogsmeade) and that the required reserve ratio is 20%. (a) As a result of Bella’s deposit, Gringotts’s cash reserves increase by: (a) $ 2,000 (b) $ 8,000 (c) $10,000 (d) $50,000 (b) As a result of Bella’s deposit, Gringotts’s required reserves increase by (a) $ 2,000 (b) $ 8,000 (c) $10,000 (d) $50,000 (c) As a result of Bella’s deposit, Gringotts’s...
Suppose you deposit $800 into your checking account of bank A. Bank A is a US...
Suppose you deposit $800 into your checking account of bank A. Bank A is a US private bank. The required reserve ratio is 10%. How much does M1 change? How much does M2 change? Draw a figure to illustrate how this initial deposit would increase the money supply for the entire economy. The figure should illustrate at least 3 rounds of deposits. Calculate the maximum amount of new money created for the economy from your deposit. Give two reason to...
1. Suppose you deposit $5,000 cash into your checking account deposit at Bank and that the...
1. Suppose you deposit $5,000 cash into your checking account deposit at Bank and that the required reserve ratio is 10%. As a result of your deposit, this bank can make a maximum loan to other customers of a. $500 b. $4500 c. $5000 d.$50000 2. If you withdraw $2,000 from your term deposit account and put it in your checking account, M1 will _____ and M3 will ____. 3. In 2015, the inflation rate of Venezuela reached 181%. In...
The balance sheet below shows the effect of a new 3,800 deposit in Bank A. Assume...
The balance sheet below shows the effect of a new 3,800 deposit in Bank A. Assume that the commercial banks have established a 16 percent desired reserve and that no bank holds excess reserves. BANK A Assets Liabilities Reserves 3,800 Deposits 3,800 Loans 0 Assume that Bank A lends its excess reserves to Mr. Jones who spends the proceeds of the loan. Show Bank A's new balance sheet BANK A Assets Liabilities Reserves   Deposits Loans The money Mr. Jones borrows...
4. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity...
4. The money creation process 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 Sean, a customer 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 balance sheet (before the bank makes any new...
7. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity...
7. The money creation process Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 10%. Hubert, a client of First Main Street Bank, deposits $250,000 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...
Assets                                         &nb
Assets                                                        Liabilities ____________________________________________________________________ Cash (reserves)                $4,000                                Deposits $100,000 Deposited at the Fed       $5,000 Loans                                 $95,000                               Capital    $4,000 ______________________________________________________________________ Total                                   $104,000                                      $104,000 The required reserve ratio on all deposits is 5% What, if any, are the bank's excess reserves? How much amount will this bank be able to lend out? If there is no currency drain and all funds loaned out by this bank are deposited back in this bank, what are the bank's excess reserves, if any, after the new deposit has been made? Answer...
You are given this balance sheet for a bank. Assets Liabilities Reserves $ 200 Deposits $2,000...
You are given this balance sheet for a bank. Assets Liabilities Reserves $ 200 Deposits $2,000 Loans $ 1,800 The required reserve ratio is 10%. a. How much is its excess reserve? b. Suppose Ms. A deposits $1,000 to her account at this bank. Show the effect of this transaction on the bank’s balance sheet. How much is its excess reserve after the transaction? c. How much will M1 increase when the money creation process (involving the whole banking sector...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT