Assume that a banking system starts from scratch with the following characteristics. The first bank has $100 in cash deposits which automatically count as reserves. The banking system has a required reserve ratio of 20% and all banks must lend out their excess reserves. Additionally, a check must be drawn in the full amount of the loan and deposited with another bank. Draw the modified balance sheet for Bank #1 and the balance sheet of the second bank in the process and show what happens to loan creation, reserves and demand deposits. Explain what should happen to the second bank. Below is the balance sheet for Bank #1:
Definitions:
Self-Liquidating
Financial transactions or investments that pay for themselves through the generation of cash flow or savings.
Significant Savings
Refers to a substantial reduction in costs or expenses, often highlighted to convince customers of the economic benefits of a product or service.
Premium
An amount paid for a contract of insurance or the added cost for a product or service that offers higher quality or features.
Writing Instruments
Tools used for writing, such as pens, pencils, markers, and others, essential in various forms of communication and art.
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