Assume that the Fed purchases a security for $500,000 from FirstBank. Also assume that the reserve ratio is 0.2 (20%).FirstBank lends its excess reserves to Betty, who does her banking at SecondBank. SecondBank lends its excess reserves to Charlie, who does his banking at ThirdBank. ThirdBank lends its excess reserves to Donna, who does her banking at FourthBank.Assume a simple money creation model, with no cash drain, no time deposits, and banks desire to hold no excess reserves. How does the open market purchase affect the final T-accounts for FirstBank, SecondBank and ThirdBank? What is the total increase in deposits that results from the initial change in reserves?
Assume that the Fed purchases a security for $500,000 from FirstBank. Also assume that the reserve ratio is 0.2 (20%).FirstBank lends its excess reserves to Betty, who does her banking at SecondBank. SecondBank lends its excess reserves to Charlie, who does his banking at ThirdBank. ThirdBank lends its excess reserves to Donna, who does her banking at FourthBank.Assume a simple money creation model, with no cash drain, no time deposits, and banks desire to hold no excess reserves. How does the open market purchase affect the final T-accounts for FirstBank, SecondBank and ThirdBank? What is the total increase in deposits that results from the initial change in reserves?
Chapter15: Money Creation
Section: Chapter Questions
Problem 15SQ
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Assume that the Fed purchases a security for $500,000 from FirstBank. Also assume that the reserve ratio is 0.2 (20%).FirstBank lends its excess reserves to Betty, who does her banking at SecondBank. SecondBank lends its excess reserves to Charlie, who does his banking at ThirdBank. ThirdBank lends its excess reserves to Donna, who does her banking at FourthBank.Assume a simple money creation model, with no cash drain, no time deposits, and banks desire to hold no excess reserves. How does the open market purchase affect the final T-accounts for FirstBank, SecondBank and ThirdBank? What is the total increase in deposits that results from the initial change in reserves?
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