Question

Reserve Requirement: 20%

Banks: A, B, C

SHOW ALL CALCULATIONS USING T ACCOUNTS

1) Lady Gaga deposits $500 in Bank A

2) Banks A keeps required reserves and uses the remainder of the deposit to buy securities from Lady Astor

3) Lady Astor keeps $100 from the sale of the securities in cash (she wants to buy a jeweled collar for her dog “Lady,” and the dogeria doesn’t take checks or credit cards) and deposits the remainder in Bank B.

4) Bank B keeps 25% of these deposits (they apparently want some excess reserves) and loans the remainder to Lady Antebellum

5) Lady Antebellum writes a check for the amount of the loan to the “Lady of the Lake” who deposits the check in Bank C.

6) How much shows up as a deposit in Bank C?

Answer 1

Consider the given problem here the reserve requirement is “20%”. So, “Lady Gaga” deposits “$500” in bank A. Now, “A” will keep “20%” of “$500” that is “$100” as reserve and use the rest of the amount “$400” to buy securities from “Lady Astor”.

“Lady Astor” keeps “$100” and deposits the rest of the amount that is “$300” in “bank B”. Now, “B” keeps “25%” of “$300” that is “$75” and loan the remainder that is “$225” to “Lady Antebellum”. Now, “Lady Antebellum” writes a check for the amount that is “$225” to “Lady Lake” who deposit the check in “bank C”, => the amount deposited in “bank C” is “$225”.