Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25
In a fractional reserve banking system, an
initial deposit in a bank can lead to a larger
total banks expansion of the money supply.
Assume that all banks can immediately loan
out all of their excess reserves, that the
reserve requirement is 20% of deposits, and
that all excess reserves loaned out are
deposited into another bank.
Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25
In a fractional reserve banking system, an initial deposit in a bank can lead to a
larger total banks expansion of the money supply. Assume that all banks can
immediately loan out all of their excess reserves, that the reserve requirement
is 20% of deposits, and that all excess reserves loaned out are deposited into
another bank.
If a stranger comes into Econvillle and deposits
$2,000.00 into Bank 1:
1. How much will Bank 1 have to keep in reserve?
2. How much will Bank 1 be able to loan out as
excess reserves?
Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25
In a fractional reserve banking system, an initial deposit in a bank can lead to a larger
total banks expansion of the money supply. Assume that all banks can immediately loan
out all of their excess reserves, that the reserve requirement is 20% of deposits, and that
all excess reserves loaned out are deposited into another bank.
3. How much will be deposited into Bank 2?
4. How much will Bank 2 have to keep in reserve?
5. How much will Bank 2 be able to loan out as
excess reserves?
6. How much will be deposited into Bank 3?
7. How much will Bank 3 have to keep in reserve?
8. How much will Bank 3 be able to loan out as
excess reserves?
Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25
In a fractional reserve banking system, an initial deposit in a bank can lead to a larger
total banks expansion of the money supply. Assume that all banks can immediately loan
out all of their excess reserves, that the reserve requirement is 20% of deposits, and that
all excess reserves loaned out are deposited into another bank.
9. How much will be deposited into Bank 4?
10. How much will Bank 4 have to keep in reserve?
11. How much will Bank 4 be able to loan out as
excess reserves?
12. How much will be deposited into Bank 5?
13. How much will Bank 5 have to keep in reserve?
14. How much will Bank 5 be able to loan out as
excess reserves?
Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25
In a fractional reserve banking system, an initial deposit in a bank can lead to a larger
total banks expansion of the money supply. Assume that all banks can immediately loan
out all of their excess reserves, that the reserve requirement is 20% of deposits, and that
all excess reserves loaned out are deposited into another bank.
15. If this process continues what will eventually be
the total expansion of the money supply?
16. How much of the money in question 15 was
created by the banking system?
Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25
In a fractional reserve banking system, an initial deposit in a bank can lead to a larger
total banks expansion of the money supply. Assume that all banks can immediately loan
out all of their excess reserves, that the reserve requirement is 20% of deposits, and that
all excess reserves loaned out are deposited into another bank.
Answers:
1. $ 400; 2. $1,600; 3. $1,600; 4. $320; 5. $1,280; 6. $ 1,280;
7. $256; 8. $1,024; 9. $1,024; 10. $204.80; 11. $819.20;
12. $819.20; 13. $163.84; 14. $655.36
15. $10,000 (1/rr) (1/.20 = 5) ($2,000 x 5 = $10,000)
16. $8,000
Mr.
Weiss
Bank Expansion of Demand Deposits – Section 5 – Module 25