Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement
How much do deposits and loans increase for the banking system when the process is completed?
Bank A first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in checkable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank B. This bank now has a change in reserves of $100, of which $90 is excess reserves. Bank B will loan out this $90, which will be deposited into Bank C. Bank C now has an increase in reserves of $90, $81 of which is excess reserves. Bank C will loan out this $81 dollars and the process will continue until there are no more excess reserves in the banking system.
For the banking system, both loans and deposits increase by $1000.
You might also like to view...
An economy's long-run equilibrium is
A) the equilibrium that would occur if prices were perfectly flexible. B) the equilibrium that would occur if prices were perfectly flexible and always adjusted immediately. C) the equilibrium that would occur if prices were perfectly flexible and always adjusted immediately to preserve full employment. D) the equilibrium that would occur if prices were perfectly fixed to preserve full employment. E) the equilibrium that would occur if prices were perfectly fixed at the full employment point.
Any firm's total revenue equals
A. P/q. B. MR/q. C. MR × q. D. P × q.