Suppose that a lottery winner deposits $10 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 10 percent and no excess reserves in the banking system prior to this deposit. Instructions:
a. Use the following T-account to show how her deposit initially affects the balance sheet at B of A.
Step 1 - Bank of America
Assets (in millions) Liabilities (in millions)
Reserves Deposits
Required
Excess
Loans
Total assets Total liabilities
b. Has the money supply been changed by her deposit?
c. Use the following T-account to show the changes at B of A after the bank fully uses its new lending capacity.
Step 2 - Bank of America
Assets (in millions) Liabilities (in millions)
Reserves Deposits
Required
Excess
Loans
Total assets Total liabilities
d. Has the money supply been changed by step 2?
e. After the entire banking system uses the lending capacity of the initial ($8 million) deposit, by how much will the following have changed?
(i) Total reserves: $__million
(ii) Total deposits: $__million
(iii) Total loans: $___million
(iv) The money supply: $___million