Question

Suppose that that there are 3 banks in the economy, call them Bank A, Bank B, and Bank C. Suppose that that all bank reserve 20% of their deposits. A consumer deposited $250 into Bank A. Bank A loaned out some money, which were all deposited into Bank B. Bank B loaned out some money, which were all deposited into Bank C.

Part a (10 points)

Construct the balance sheet for each bank. That is, fill out the following tables for Bank A, Bank B, and Bank C. Note: Remember to write down reserves, deposits, and loans for each bank for full credits!

Assets Reserves

Bank A Deposits

Loans
Bank B

Liabilities

    

Assets Reserves

Liabilities Deposits

    

Loans
Bank C

Assets Reserves

Loans

Liabilities Deposits

     

Part b (10 points)

Using the balance sheets above, fill out the table below

Stage	Currency	Checkable deposits	Money supply
Before depositing
Depositing in Bank A
Bank A made loan
Depositing in Bank B
Bank B made loan
Depositing in Bank C
Bank C made loan

Answer 1

Part A

Bank A
Assets	Liabilities
Reserves	50	Checkable Deposits	250
Loans	200
Bank B
Assets	Liabilities
Reserves	40	Checkable Deposits	200
Loans	160
Bank C
Assets	Liabilities
Reserves	32	Checkable Deposits	160
Loans	128

• Given above are the balance sheets of the 3 banks, with assets and the liabilities column. Initially the customer deposits $250 in Bank A. Given the reserve requirement of 20% Bank A keeps 20% ($50) as reserves and loans the reaming 80% ($200) to another customer.
• Suppose individual who receives $200 as loans, further deposits that amount in his/her Bank B. Thus, the checkable deposits of Bank B are $ 200. However, with the given required reserve ratio of 20%, the respective bank keeps 20% ($40) as reserves and further loans the remaining 80% ($160).
• The same process repeats, where in the recipient of $160, deposits this amount in his/her Bank C. Thus, the checkable deposits of Bank C are $160. However, with the given required reserve ratio of 20%, the respective bank keeps 20% ($32) as reserves and further loans the remaining 80% ($128).

Part B

Using the below money supply equation we solve for the below table:

Money Supply = Currency In Circulation + Checkable Deposits

M1 = C + CD

• Before depositing, the currency held by the public is (assuming only customer) its $250. There are no checkable deposits. Thus MS = $250.
• In each stage when money is deposited in the bank, we assume all that currency held by the public is deposited in the bank and C= 0
• In the stages where the bank supplies loans, till the time that amount is not deposited in the bank, the loaned amount is considered as the currency in circulation.

Stage	Currency	Checkable Deposits	MS
Before Depositing	250	0	250
Depositing in Bank A	0	250	250
Bank A Made Loan	200	250	450
Depositing in Bank B	0	200	200
Bank B Made Loan	160	200	360
Depositing in Bank C	0	160	160
Bank C Made Loan	128	160	288