economics

ES2560: Week 8 The Money-Creation Process

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Suppose that First National Bank, Second National Bank, and Third National Bank have zero

excess reserves. The required reserve ratio is 20%. The Federal Reserve buys a government

bond worth $1.5 million from John, a client of First National Bank. He deposits the money into

his checking account at First National Bank.

Tasks:

Suppose that First National Bank loans out all its new excess reserves to Nancy, who

immediately uses the funds to write a check for Mark. Mark deposits the funds immediately

into his checking account at Second National Bank. Then, Second National Bank lends out all its

new excess reserves to Kyle, who writes a check for Amy, who deposits the money into her

account at Third National Bank. Third National Bank lends out all its new excess reserves as

well.

Fill in the following table to show the effect of this ongoing chain of events at each of the banks.

Enter each answer to the nearest penny.

Bank Increase in

Demand Deposits

Increase in Required

Reserves

Increase in

Loans

First National Bank

Second National Bank

Third National Bank

Remember to adhere to APA guidelines, standards, and formatting.

Submission Requirements:

Submit the analysis for grading in approximately two to three pages before the end of the

week.

Format: Microsoft Word

Font: Arial, 12-point, double-spaced

ES2560: Week 8 The Money-Creation Process

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Evaluation Criteria:

Criteria Points Assigned Points Earned

Did you answer all parts of the question properly? 80

Did you use appropriate grammar and spelling, and cited

references, where applicable?

15

Did you adhere to APA guidelines, standards, and

formatting?

5