Suppose first main street bank, second republic bank, and third fidelity bank all have zero excess reserves. the required reserve ratio is 10%. the federal reserve buys a government bond worth $500,000 from manuel, a client of first main street bank. he deposits the money into his checking account at first main street bank.

Suppose first main street bank, second republic bank, and third fidelity bank all have zero excess reserves. the required reserve ratio is 10%. the federal reserve buys a government bond worth $500,000 from Manuel, a client of first main street bank the following are the outcome of the money deposited:

1. What will reflect any changes in First Main Street Bank's T-account will                be:

Assets:

Reserves $500,000

Liabilities:

Deposits $500,000

On the T-account asset side the $500,000 will increase the bank's reserves account while  on the T-account liability side the $500,000 with be the demand deposit.

2. The effect of a new deposit on excess and required reserves when the               required reserve ratio is 10% will be:  

Amount Deposited: $500,000

Change in Excess Reserves $450,000

($500,000×90%)

Change in Required Reserves $50,000

($500,000×10%)

3.  The effect of this ongoing chain of events at each bank will be:

First Main Street Bank: $500,000 $50,000 $450,000

($500,000×10%=$50,000) ($500,000×90%=$450,000)

Second Republic Bank: $450,000 $45,000 $405,000

($450.000×10%=$45,000) ($450,000×90%=$405,000)

Third Fidelity Bank: $405,000 $40,500  $364,500

($405,000×10%=%40,500) ($405,000×90%=$364,500)

2. Under these assumptions, the $500,000 injection into the money supply  results in an overall increase of $5,000,0000_in demand deposits.

Calculated using money multiplier formula

Change in Demand Deposits = Change in fresh Reserves ×1/r

Where:

Change in Demand Deposits= $500,000

r = required reserve ratio=10% or 0.10

Let plug in the formula

Change in Demand Deposits= $500,000×1/0.10

Change in Demand Deposits= $5,000,000

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Some part of the questions where missing. Below are the complete missing questions:

1. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans).

2. Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.

Hint: If the change is negative, be sure to enter the value as negative number.

3. Now, suppose First Main Street Bank loans out all of its new excess reserves to Eileen, who immediately uses the funds to write a check to Clancy. Clancy deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Manuel, who writes a check to Kate, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Poornima in turn.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

4. Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of in demand deposits.

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