(Solved): 4. The money creation process Suppose a country has a fractional reserve banking system where bank ...

4. The money creation process Suppose a country has a fractional reserve banking system where banks are required to maintain reserves of 10% against their checking deposits. Further, First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The central bank buys a government bond worth $500,000 from Alex, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank. 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. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 500,000 Now, suppose First Main Street Bank loans out all of its new excess reserves to Susan, who immediately uses the funds to write a check to Raphael. Raphael 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 Alex, who writes a check to Becky, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Eileen as well. 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. Increase in Deposits Increase in Required Reserves (Dollars) (Dollars) Increase in Loans (Dollars) First Main Street Bank Second Republic Bank Third Fidelity Bank 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.