Question

2. Assume that Susan deposits $3000 of cash into bank A and the reserve requirement is 10%.

a. Complete a simple T-account for bank A showing this deposit and asume that bank A lends out its excess reserves to Bill.

b. Bill uses the entire loan to buy groceries at Rouses Supermarket and Rouses deposits it in bank B. Suppose bank B lends out all its excess reserves to Maria, and her loan ends up in bank C. Fill in the T-accounts for bank B and bank C.

c. Assuming that this chain reaction continues to happen until the money is exhausted, how much total deposits would have been created from Susan’s initial deposit?

Answer 1

a. Given,

Deposits made by Susan in bank A = $3,000

Reserve requirement = 10% = 0.10

Required reserves = Required reserve ratio * Deposits = 0.10 * $3,000 = $300

Loanable funds = Deposits - Reserve requirement = $3,000 - $300 = $2,700

T-account for Bank A
Assets ($)	Liabilities ($)
Reserves	300	Deposits	3,000
Loans	2,700
Total	3,000	Total	3,000

b.

Deposits made by Rouses in bank B = $2,700

Required reserves = Required reserve ratio * Deposits = 0.10 * $2,700 = $270

Loanable funds = Deposits - Reserve requirement = $2,700 - $270 = $2,430

T-account for Bank B
Assets ($)	Liabilities ($)
Reserves	270	Deposits	2,700
Loans	2,430
Total	2,700	Total	2,700

Deposits made by Maria in bank C = $2,430

Required reserves = Required reserve ratio * Deposits = 0.10 * $2,430 = $243

Loanable funds = Deposits - Reserve requirement = $2,430 - $243 = $2,187

T-account for Bank C
Assets ($)	Liabilities ($)
Reserves	243	Deposits	2,430
Loans	2,187
Total	2,430	Total	2,430

c.

Money multiplier = 1/Required reserve ratio = 1/0.10 = 10

Total deposits that would have been created from Susan's initial deposit = Money multiplier * Initial deposit = 10 * $3,000 = $30,000