Assume that commercial banks are required to keep a legal reserve of 25% of demand deposits.
A rich man who has previously been keeping $1 million in cash in his safe at home deposits this $1 million in a commercial bank. Show the effects of this action as follows:
a. Show the change in the balance sheet of the commercial bank receiving this money after it has been transferred to the Federal Reserve, but before it has had time to expand loans at all.
b. Show 4 iterations of the money-expansion process: three balance sheets and the clearing pyramid in each iteration.
c. Show the change in the combined balance sheet of all commercial banks together (i.e; the balance sheet of the "banking system") after loans have been expanded in keeping with the increase in cash deposited.