Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government bond worth $1,500,000 from Manuel, a customer of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account.
Assets Liabilities
Reserves/deposits/net work/loan Reserves/deposits/net work/loans
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 Deposited Change in Excess Reserves Change in Required Reserves
(Dollars) (Dollars) (Dollars)
Now, suppose First Main Street Bank loans out all of its new excess reserves to Latasha, who immediately uses the funds to write a check to Jake. Jake deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Nick, who writes a check to Rosa, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Alyssa as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank.
Increase in Deposits Increase in Required Increase in
Reserves Loans
(Dollars) (Dollars) (Dollars)
First Main Street Bank
Second Republic Bank
Third Fidelity Bank