Question

Assume that required reserves are 7 percent of deposits and that people hold no currency—all money is held in the form of checking deposits.

a. Suppose that the Federal Reserve purchases $30,000 worth of government bonds from Ellen (a private citizen), and that Ellen deposits all of the proceeds from the sale into her checking account at Z Bank. Construct a balance sheet, with assets on the left and liabilities on the right, to show how Ellen’s deposit creates new assets and liabilities for Z Bank.

b. How much of this new deposit can Z Bank lend out? Assume that it lends this amount to George, who then deposits the entire amount into his account at Y Bank. Show this on Y Bank’s balance sheet.

c.How much of this new deposit can Y Bank lend out? Suppose Joe takes out a loan for this amount from Y Bank and deposits the money into his account at X Bank. Show this on X Bank’s balance sheet.

d.The process of lending and relending creates money throughout the banking system. As a result of Ellen’s deposit, how much money, in the form of deposits, has been created so far? If this process resulting from Ellen’s deposit continues forever, how much money will be created?

Answer 1

a) Z bank balance sheet.

Assets	AMount	Liabilites	AMount
REserves	2100	Deposits	30000
Loans	27900
Total	30000	Total	30000

b)  

Y bank balance sheet

Assets	Amount	Liabilities	AMount
Reserves	1953	Deposits	27900
loans	25947
total	27900	total	27900

c) Y bank can lend out 25947 .

X bank balance sheet

assets	AMOUNT	liabilites	amount
reserves	1816.29	deposits	25947
loans	24130.71
total	25947	total	25947

d) The process of Ellen's deposit continues forever , then the total money creater equal to depsoit amount multiple by money mutlitplier.

money multiplier = 1/ rrr

money multiplier = 1/.07 = 14.28

money created = 30000 * 14.28 = 428400

so, total money creater from ellen deposit is equal to 428400.