Johnny Batcap withdraws $15,000 from his checking account at The BC Bank. He pays $10,000 to Sammuel Loanshark, who puts the money in his checking account at the Sangsters Bank. Johnny uses the other $5,000 as paper for his hand-rolled cigarettes, all of which he smokes ("nothing smokes better than a $100 bill," He loves to tell his friends).
Assume that all banks hold only the requjired 10% reserves and always loan out the rest, and no cash is held by the public.
A. What is the ultimate net effect on the money supply in the economy? Show your work.
B. Assume instead that Sammuel uses the $10,000 he recieves to pay back a loan from bad boys bank. $8,000 goes to repay the loan itself, and $2,000 represents his interest payment. Show the immediate changes on Bad Boys Bank's balance sheet resulting from sammuels payment.
C. Ultimately what will be the total amount of new loans in the economy after Sammuels payment. Show your work.