Consider a new deposit to the US banking system of $1000. Suppose that all commercial banks have a target reserve ratio of 10% and there is no cash drain. The attached below shows how deposits, reserves, and loans change as the new deposit permits the banks to "create" money.
1) The first round has been completed in the table. Now, recalling the new loans in the first round become the new deposits in the second round, complete the entire table.
2) You have now completed the first 5 rounds of the desposit-creation process. What is the total change in deposits so far as a result of the single new deposit of $1000?
3) This deposit-creation process will go on forever, but it will have a finite sum. In the text, we showed that the eventual total change in the deposits is equal to 1/v times the new deposit, where v is the target reserve ratio. What it s eventual total change in deposits in this case?
4) What is the eventual total change in reserve? What is the eventual change in loans?
| Round |
Deposits |
Reserves |
Loans |
| First |
$1,000 |
$100 |
$900 |
| Second |
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| Third |
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| Fourth |
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| Fith |
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