Econ Study Guide Test.

ECON STUDY GUIDE TEST. Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Hubert, a client of First Main Street Bank, deposits $1,500,000 into his checking account at First Main Street Bank. Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans). - CORRECT ANSWER Assets: Reserves $1,500,000 Liabilities: Deposits $1,500,000 Explanation: When Hubert deposits the $1,500,000 into First Main Street Bank, it creates both an asset and a liability for the bank. On the asset side of the T-account, the $1,500,000 increases the bank's reserves. The bank can use some of these additional reserves to make loans to other people. On the liability side of the T-account, the $1,500,000 is recorded as a demand deposit, because Hubert could demand his deposit back at any time by coming into the bank and asking for it, by writing a check, or by using a debit card. Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%. Hint: If the change is negative, be sure to enter the value as negative number. - CORRECT ANSWER Amount Deposited: $1,500,000 Change in Excess Reserves: $1,200,000 Change in Required Reserves: $300,000 Explanation: Because the required reserve ratio is 20%, First Main Street Bank is required to hold 20% of its fresh reserves (that is, the initial deposit). Since 20% of $1,500,000 is $300,000, this means that First Main Street Bank's required reserve has increased by $300,000. The remaining 80% of the fresh reserves, or $1,200,000, is excess reserves and can be used to make loans 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. - CORRECT ANSWER Increase in Deposits Increase in Required Reserves Increase in Loans First Main Street Bank: 1,500,000 300,000 1,200,000 Second Republic Bank: 1,200,000 240,000 960,000 Third Fidelity Bank: 960,000 192,000 768,000