Question

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 checking account deposits that can result from your $2000 deposit? What is the maximum increase in the money supply?

Homework Answers

Answer #1

(a)

Assets $ Liabilities & Capital $
Required Reserves 400 Deposits 2,000
Excess reserves 1,600

(b)

After loans equal to excess reserves are made:

Assets $ Liabilities and capital $
Required (Total) reserves 400 Deposits 2,000
Loans 1,600

(c)

Maximum increase in deposits ($) = [(Initial deposit / Reserve ratio)] - Initial deposit = (2,000/0.2) - 2,000 = 10,000 - 2,000

= 8,000

Maximum increase in money supply ($) = Initial deposit / Reserve ratio = 2,000/0.2 = 10,000

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