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Hint: If the change is negative, be sure to enter the value as a negative number.

\begin{tabular}{ccc}
Amount Deposited (Dollars) & Change in Excess Reserves (Dollars) & Change in Required Reserves (Dollars) \\
\hline
750,000 & 150,000 & 600,000 \\
\hline
\end{tabular}

Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Janet, who immediately uses the funds to write a check to Felix. Felix deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Raphael, who writes a check to Megan, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Susan in turn.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

\begin{tabular}{l|c|c|}
\hline
& Increase in Deposits (Dollars) & Increase in Required Reserves (Dollars) \\
\hline
Southeast Mutual Bank & [tex]$\square$[/tex] & [tex]$\square$[/tex] \\
\hline
Walls Fergo Bank & [tex]$\square$[/tex] & [tex]$\square$[/tex] \\
\hline
\end{tabular}

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the \[tex]$750,000 injection into the money supply results in an overall increase of $[/tex]\quad$ in demand deposits.



Answer :

GinnyAnswer
To solve this problem, let's break down the sequence of events as money is loaned out and re-deposited, understanding the impact on deposits and required reserves at each step.

### 1. Initial Situation at Southeast Mutual Bank
- Initial Deposit: [tex]$750,000 - Increase in Required Reserves: $[/tex]600,000 (80% of [tex]$750,000) - Increase in Excess Reserves: $[/tex]150,000 (remaining 20% of [tex]$750,000) ### 2. Event Sequence: Let's assume the reserve ratio is calculated based on initial deposits: - Reserve Ratio: \( \frac{600,000}{750,000} = 0.8 \) or 80% Using this ratio, we'll calculate the increase in deposits, required reserves, and the loanable amount (excess reserves) at each bank: ### Step-by-Step Breakdown: 1. First Bank (Southeast Mutual Bank): - Increase in Deposits: $[/tex]750,000
- Increase in Required Reserves: [tex]$600,000 (80% of $[/tex]750,000)
- Increase in Excess Reserves: [tex]$150,000 2. Second Bank (Walls Fergo Bank): - Increase in Deposits: $[/tex]150,000 (from loan by Southeast Mutual)
- Increase in Required Reserves: [tex]$120,000 (80% of $[/tex]150,000)
- Increase in Excess Reserves: [tex]$30,000 (remaining 20% of $[/tex]150,000)

3. Third Bank (PJMorton Bank):
- Increase in Deposits: [tex]$30,000 (from loan by Walls Fergo) - Increase in Required Reserves: $[/tex]24,000 (80% of [tex]$30,000) - Increase in Excess Reserves: $[/tex]6,000 (remaining 20% of [tex]$30,000) 4. Fourth Bank: - Increase in Deposits: $[/tex]6,000 (from loan by PJMorton)
- Increase in Required Reserves: [tex]$4,800 (80% of $[/tex]6,000)
- Increase in Excess Reserves: [tex]$1,200 (remaining 20% of $[/tex]6,000)

5. Fifth Bank:
- Increase in Deposits: [tex]$1,200 (from loan by Fourth Bank) - Increase in Required Reserves: $[/tex]960 (80% of [tex]$1,200) - Increase in Excess Reserves: $[/tex]240 (remaining 20% of [tex]$1,200) 6. Sixth Bank: - Increase in Deposits: $[/tex]240 (from loan by Fifth Bank)
- Increase in Required Reserves: [tex]$192 (80% of $[/tex]240)
- Increase in Excess Reserves: [tex]$48 (remaining 20% of $[/tex]240)

7. Seventh Bank:
- Increase in Deposits: [tex]$48 (from loan by Sixth Bank) - Increase in Required Reserves: $[/tex]38 (80% of [tex]$48) - Increase in Excess Reserves: $[/tex]10 (remaining 20% of [tex]$48) 8. Eighth Bank: - Increase in Deposits: $[/tex]10 (from loan by Seventh Bank)
- Increase in Required Reserves: [tex]$8 (80% of $[/tex]10)
- Increase in Excess Reserves: [tex]$2 (remaining 20% of $[/tex]10)

9. Ninth Bank:
- Increase in Deposits: [tex]$2 (from loan by Eighth Bank) - Increase in Required Reserves: $[/tex]2 (80% of [tex]$2) - Increase in Excess Reserves: $[/tex]0 (remaining 20% of [tex]$2) After 9 iterations, the sequence continues to diminish with exponentially decreasing amounts. The overall increase in demand deposits, reflecting the total money created in the banking system, adds up from the initial deposits at each bank in the chain. ### Summary: - Banks: - Southeast Mutual Bank: - Increase in Deposits: $[/tex]750,000
- Increase in Required Reserves: [tex]$600,000 - Walls Fergo Bank: - Increase in Deposits: $[/tex]150,000
- Increase in Required Reserves: [tex]$120,000 - PJMorton Bank: - Increase in Deposits: $[/tex]30,000
- Increase in Required Reserves: [tex]$24,000 And similarly for the subsequent banks. ### Total Increase in Demand Deposits: - The total cumulative increase in money supply through deposits across all banks adds up to approximately $[/tex]937,500.

Thus, under the assumptions given, the [tex]$750,000 injection into the money supply results in an overall increase of $[/tex]937,499.52 in demand deposits.

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