Question

A new immigrant arrives in Nova Scotia and opens a demand deposit account in the amount of $40,000 with Scotia Bank.  

1. Assuming a target reserve ratio of 10% for all banks, and the willingness of the bank to make loan, use a T-account to show this transaction on Scotia Bank’s balance sheet.
2. Complete the following table by showing the change in deposit, reserve and loan, assuming that the loan that was created by Scotia Bank became a deposit with TD Bank; and the loan that was created by TD became a deposit with CIBC and so on.  

  

Bank	DDeposits	DReserves	DLoans
Scotia Bank	$40,000
TD Bank
CIBC
Royal Bank
National Bank

3. c. After infinite rounds of depositing and lending, what is the eventual total change in deposits?

Answer 1

New demand deposit= 40000

a.

Reserve requirement= 10%

Reserves= 40000 x 10%= 4000

T-account of Scotia Bank’s balance sheet:

Assets	Liabilities
Reserve 4000	Demand deposits 40000
Excess reserve(amount to give as a loan) 36000

b.

Bank	Deposits	Reserves	Loans
Scotia Bank	40000	4000	36000
TD Bank	36000	3600	32400
CIBC	32400	3240	29160
Royal Bank	29160	2916	26244
National Bank	26244	2624.4	23613.6

c.

Total deposits= Initial deposit x 1/reserve requirement

Total deposit= 40000 x 1/10%

Total deposit= 40000 x 10= $400,000

Total change in deposit= $400,000- $40000= $360,000