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QUESTION:
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 20%. Bob, a Southeast Mutual Bank customer, deposits $1,500,000 into his checking account at the local branch.
Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).
AssetsLiabilities
                
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount DepositedChange in Excess ReservesChange in Required Reserves
(Dollars)(Dollars)(Dollars)
1,500,000 
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Yvette, who immediately uses the funds to write a check to Sean. Sean deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Eric, who writes a check to Cho, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Ginny in turn.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.
Increase in DepositsIncrease in Required ReservesIncrease in Loans
(Dollars)(Dollars)(Dollars)
Southeast Mutual Bank
Walls Fergo Bank
PJMorton Bank
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of    in demand deposits.

ANSWER:

Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).
AssetsLiabilities
Reserves  Correct $1,500,000  Correct Deposits  Correct $1,500,000  Correct 
Points:
1 / 1
Close Explanation
Explanation:
When Bob deposits the $1,500,000 into Southeast Mutual Bank, it creates both an asset and a liability for the bank.
On the asset side of the T-account, the $1,500,000 increases the bank's reserves. The bank can use some of these additional reserves to make loans to other people.
On the liability side of the T-account, the $1,500,000 is recorded as a demand deposit, because Bob could demand his deposit back at any time by coming into the bank and asking for it, by writing a check, or by using a debit card.
AssetsLiabilities
Reserves$1,500,000Deposits$1,500,000
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.
Hint: If the change is negative, be sure to enter the value as negative number.
Amount DepositedChange in Excess ReservesChange in Required Reserves
(Dollars)(Dollars)(Dollars)
1,500,000 
1,200,000
Correct
300,000
Correct
Points:
1 / 1
Close Explanation
Explanation:
Because the required reserve ratio is 20%, Southeast Mutual Bank is required to hold 20% of its fresh reserves (that is, the initial deposit). Since 20% of $1,500,000 is $300,000, this means that Southeast Mutual Bank's required reserve has increased by $300,000.
The remaining 80% of the fresh reserves, or $1,200,000, is excess reserves and can be used to make loans.
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Yvette, who immediately uses the funds to write a check to Sean. Sean deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Eric, who writes a check to Cho, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Ginny in turn.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.
Increase in DepositsIncrease in Required ReservesIncrease in Loans
(Dollars)(Dollars)(Dollars)
Southeast Mutual Bank
1,500,000
Correct
300,000
Correct
1,200,000
Correct
Walls Fergo Bank
1,200,000
240,000

960,000

PJMorton Bank
960,000

192,000

768,000

Points:
0.33 / 1
Close Explanation
Explanation:
You already found that of the $1,500,000 initial deposit, 20% (or $300,000) had to be held as required reserves and the remaining 80% (or $1,200,000) could be loaned out.
If you follow that $1,200,000 loan, you can see that when it is deposited into Walls Fergo Bank, 20% of that $1,200,000 must be held as required reserves by Walls Fergo Bank and the remaining 80% can be loaned out:
Increase in Walls Fergo Bank's Required Reserves = 0.20×$1,200,000
 = $240,000
Increase in Walls Fergo Bank's Excess Reserves = 0.80×$1,200,000
 = $960,000
Now, those $960,000 of excess reserves can be loaned out. When they are loaned and then deposited into PJMorton Bank, PJMorton Bank's required and excess reserves increase in the same way:
Increase in PJMorton Bank's Required Reserves = 0.20×$960,000
 = $192,000
Increase in PJMorton Bank's Excess Reserves = 0.80×$960,000
 = $768,000
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of$7,500,000  Correct in demand deposits.
Points:
1 / 1
Close Explanation
Explanation:
Under the assumptions stated in the problem, you can use the money multiplier to calculate the eventual effect of the $1,500,000 injection into the money supply.
The formula for the money multiplier is 1r, where r is the required reserve ratio. Therefore, the resulting change in demand deposits is as follows:
Change in Demand Deposits = Change in Fresh Reserves (that is, the Initial Deposit)×1r
 = $1,500,000×10.20
 = $7,500,000

Posted by Cleveland on September 9, 2024
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