Imagine that you win $75,000 in the lottery. You decide to deposit all of it into Bank
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Question:
Imagine that you win $75,000 in the lottery. You decide to deposit all of it into "Bank #1". All banks are required to keep 10% as reserves.
- Draw the t-account for "Bank #1". Be sure to label deposits, reserves, and loans. What would money supply be after Bank #1 makes the loan?
- Suppose that Amy receives the loan from Bank #1 and spends all of it remodeling her kitchen. Amy pays Contractor Carrie and Carrie deposits the money into "Bank #2". Draw the t-account for Bank #2. Be sure to label deposits, reserves, and loans. What would money supply be after Bank #2 makes the loan?
- Suppose that Bill receives the loan from Bank #2 and spends all of it buying a boat. Bill pays Boatman Bob and Bob deposits the money into "Bank #3". Draw the t-account for Bank #3. Be sure to label deposits, reserves, and loans. What would money supply be after Bank #3 makes the loan?
- NOW, instead of drawing t-accounts again and again and again to determine how money banks can create with the initial $75,000, use the money multiplier to determine total money supply AND how much money the banks created.
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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