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

a.

Asset	Liabilities
Reserve	$4,000	Deposits	40000
Loans	36000

With 40,000 deposited in the bank, the bank can loan out 36,000 and keep 4000 as required reserves.

b.

Bank	DDeposits	DReserves	DLoans
Scotia Bank	$40,000	$4,000	$36,000
TD Bank	$36,000	$3,600	$32,400
CIBC	$32,400	$3,240	$29,160
Royal Bank	$29,160	$2,916	$26,244
National Bank	$26,244	$2,624.40	$23,619.60

Banks are required to keep 10% of their deposits as a reserve and can loan out the rest of the funds, so TD bank after getting a 36,000 deposit will keep 3600 as reserve and loan out 32400. now CIBC bank will get the 32400 as deposit and will have to keep 3240 as a reserve and will loan out 29,160, and so on.

c. We can see the effect of one deposit on banks, it creates a ripple effect. The amount of change in the money supply due to the change in the monetary base is the money supply. After infinite rounds of depositing and lending, we will get how much our money supply changed.

Formula = 1/reserve ratio

= 1/10%

=10

Change in money supply or total change in deposits = 40,000 * 10

= 400,000