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

question 64

Essay

Suppose you deposit $4,000 in currency into your checking account at Bank of America.Assume that Bank of America has no excess reserves at the time you make your deposit and that the required reserve ratio is 10 percent.
a.Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet.
b.Suppose that Bank of America 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 check for this amount and that the person receiving the check deposits it in Bank of Boston.Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston,after the check has been cleared.On the T-account for Bank of America,include the transactions from questions (a)and (b).
d.What is the maximum increase in checking 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:

Compounded Annually

Interest calculation method where the interest is added to the principal at the end of each year, impacting the amount in the following year.

Maturity Value

The amount that will be received at the end of a fixed-income investment period such as a bond or certificate of deposit.

Investment

An investment is an asset or item acquired with the goal of generating income or appreciation over time.

Investment

The action or process of investing money for profit or material result, often involving risk.