Q.19 Using T-accounts, show what happ... [FREE SOLUTION]

Chapter 15: Q.19 (page 410)

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends $$ 1$ million to the First National Bank.

Short Answer

Expert verified

Ultimately, the cumulative effect of the $$ 1$ mil. lent by the Fed to a commercial bank on the deposits in the banking system is: $m 路螖 R = 10 路 $ 1$ million $鈮� $ 10$ million

Step by step solution

Concept introduction

A T-account is a casual term for a set of monetary records that utilizations twofold entry accounting. The term depicts the presence of the accounting entries. First, an enormous letter T is drawn on a page.

FIRST NATIONAL'S BALANCE SHEET

The borrowed funds "go into the vault." So, reserves increase by $\$ 1$ mil:

ASSETS

LIABILITIES

$+ $ 1$ million reserves

$+ $ 1$ million new LOANS

+ $ 1

mil. borrowings from Fed

Whenever the abundance saves are lent out, the advances are deposited into something similar or other business banks:

ASSETS	LIABILITIES
$+ r_{D} * $ 1$ million $= $ 100, 000$ reserves	$+ $ 1$ million new deposits
$+ (1 - r_{D}) $ 1 mil = $ 900, 000$ new loans	+ see the next box

Step 3:

More Reserves are retained, and the overabundance is lent out, then deposited into something similar or other business banks:

ASSETS	LIABILITIES
$+ 10 % * $ 900, 000 = $ 90, 000$ reserves	$+ $ 900, 000$ new deposits
$+ 90 % = $ 810, 000$ new loans new loans

this process of multiple deposit creation continues indefinitely.

ASSETS	LIABILITIES
$+ 10 % * $ 10, 000, 000 = $ 1$ mil reserves	$+ $ 10, 000, 000$ new deposits
$+ 90 % = $ 9$ mil. in new loans

Ultimately, the cumulative effect of the $$ 1$ mil. lent by the Fed to a business bank on the deposits in the financial system is:

$m 路螖 R = 10 路 $ 1$ million $鈮� $ 10$ million

Final Answer

Ultimately, the cumulative effect of the $$ 1$ mil. lent by the Fed to a business bank on the deposits in the financial system is: $m 路螖 R = 10 路 $ 1$ million $鈮� $ 10$ million

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Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends $$ 1$ million to the First National Bank.

Short Answer

Step by step solution

Concept introduction

FIRST NATIONAL'S BALANCE SHEET

Step 3:

Final Answer

One App. One Place for Learning.

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91影视

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends $1million to the First National Bank.

Short Answer

Step by step solution

Concept introduction

FIRST NATIONAL'S BALANCE SHEET

Step 3:

Final Answer

One App. One Place for Learning.

Most popular questions from this chapter

Recommended explanations on Economics Textbooks

Taxation Economics

Study anywhere. Anytime. Across all devices.

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed lends $$ 1$ million to the First National Bank.