Suppose You Deposit $4,000 in Currency into Your Chequing Account

question 56

Essay

Suppose you deposit $4,000 in currency into your chequing account at Royal Bank.Assume that Royal Bank has no excess reserves at the time you make your deposit and that the desired reserve ratio is 10 percent.
a.Use a T-account to show the initial effect of this transaction on Royal Bank's balance sheet.
b.Suppose that Royal Bank makes the maximum loan they can from the funds you deposited.Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan.Also include in this T-account the transaction from question (a.).
c.Now suppose that whoever took out the loan in question (b)writes a cheque for this amount and that the person receiving the cheque deposits it in CIBC.Show the effect of these transactions on the balance sheet of Royal Bank and CIBC, after the cheque has been cleared.On the T-account for Royal Bank, include the transactions from questions (a)and (b).
d.What is the maximum increase in chequing account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

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Definitions:

Equilibrium World Price

The price at which the supply of a good on the global market equals the demand for that good.

Two-Nation Model

An economic model used in international trade theory to analyze the effects of trade between two countries, considering factors like comparative advantage.

World Price

The international market price at which goods and services are traded between countries.

Domestic Price

The price of goods or services within a particular country, influenced by domestic supply and demand, taxation, and other economic factors.