suppose we have a banking system in which the public chooses to make all of its...

suppose we have a banking system in which the public chooses to make all of its purchases by using checking deposits. in addition, banks desire to maximize the reserve ratio is 20% and the FED purchases $1,000,000 in treasury bills from bank 1. explain what happens to this bank (Bank 1) and two additional steps in the deposit expansion process based on the 20% reserve requirement. Put differently, what will be the change in deposits for the first bank (Bank1) the second bank (Bank 2) and the third bank (Bank 3)

Solutions

Expert Solution

Bank1:

Increase in reserve = $1000000

Decrease in treasury bills = $1000000

Change in deposits = No change

Change in total assets = No change

Change in total liability = No change

Now $1000000 will be issued as loans.

Bank 2:

Increase in Deposit = $1000000

Increase in required reserve = 1000000*20% = $200000

Increase in Excess Reserve = 1000000*(1-20%) = $800000

Now, $800000 will be issued as loans.

Bank 3:

Increase in Deposit = $800000

Increase in required reserve = 800000*20% = $160000

Increase in excess reserve = 800000*(1-20%) = $640000

Now, $640000 will be issued as loans.

Rahul Sunny answered 1 year ago

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