Question

Many individuals who receive a stimulus check as a result of COVID- 19 will receive a $1200 direct deposit. Individuals earning between 75k and 99k will only receive a fraction of the $1200 deposit. Suppose Debra earned above 75k in 2018 and 2019 and only receives a $1000 direct deposit stimulus. Using the bank ledger, we have seen in class, and assuming the required reserve ratio is .7, show three bank deposits from the initial round of spending. What is the ultimate impact on money supply? In one or more paragraph describe what happens in each round of spending and the overall impact on money supply. Also include in your explanation, alongside a clearly labeled graph, the impact on the money market.

PLEASE HELP WITH THE GRAPH(S) SPECIFICALLY.

Answer 1

Increase in required reserves ($) = Increase in deposit x Reserve ratio = Increase in deposit x 0.7

Increase in excess reserves ($) = Increase in deposit - Increase in required reserves

(I) Bank I

Assets	$	Liabilities & Equity	$
Required reserves	700	Deposit	1,000
Excess reserves	300

(II) Bank II

Assets	$	Liabilities & Equity	$
Required reserves	490	Deposit	700
Excess reserves	210

(II) Bank III

Assets	$	Liabilities & Equity	$
Required reserves	343	Deposit	490
Excess reserves	147

(IV) Total increase in money supply ($) = (Initial Increase in deposit / Reserve ratio) + Initial increase in deposit

= (1,000 / 0.7) + 1,000

= 1,428.57 + 1,000

= 2,428.57

Note that if initial deposit is excluded, then money supply increases by $1,428.57.

(V) In each round, the $N increase in deposit increases required reserves by ($N x 0.7) and excess reserves by [$N x (1 - 0.7) = $N x 0.3]. The bank lends out the excess reserves, which is deposited in the next bank. This leads to an increase in money supply.

(VI) Increase in money supply shifts money supply curve rightward, decreasing interest rate and increasing quantity of money.

In following graph, MD0 and MS0 are initial money demand and supply curves, intersecting at point A with initial interest rate r0 and quantity of money M0. Increase in money supply causes MS0 to shift right to MS1, which intersects MD0 at point B with lower interest rate r1 and higher quantity of money M1.