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/servlet/quiz?quiz action takeQuiz&quiz; probGuid-ONAPCUA8010100000040138bsubebbuuac 9. The money destruction process Aa Aa Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Alex, a client of Arst Main Street Bank, suddeny withdraws $750,000 and purchases Treasury bills from the Fed. The Fed then destroys the $750,000. On the assets side of First Main Street Bank\'s balance sheet (before the bank makes any new loans), this . On the liabilities side of by by increases First Main Street Bank\'s First Main Street Bank\'s balance sheet, this First Main Street Bank\'s Because the required reserve ratio is 20%, the $750,000 withdrawal required reserves by must- outstanding loans First Main Street Bank\'s In order to maintain the required reserve ratio, First Main Street Bank now its reserves by One possible way to do this is to its Now suppose Amy repays her loan of $600,000 to First Main Street Bank by writing a check issued by Second Republic Bank. First Main Street Bank uses funds from a loan repayment to increase its reserves instead of making new loans. Second Republic Bank then replenishes its reserves by using the funds from loan repayments by Nick, who writes a check issued by Third Fidelity Bank. Third Fidelity Bank then uses a loan repayment from Hilary to replenish its reserves instead of making new loans Fill in the following table to show the effect of this ongoing chain of events at each of the banks, including the initial withdrawal at the beginning of the question. Enter each answer to the nearest penny Decrease in Decrease in Demand Deposits Required Reserves Loans Bank First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan being repaid using a checking account and banks using repayments to replenish their reserves without issuing any new loans. Under these assumptions, the initial destruction of $750,000 by the Fed caused banks to reduce their outstanding loans by in an overall decrease of resulting in demand deposits

Solution

Ans

Decreases

Reserves

By 750000

Decreses by 750000(20%)=150000

Decrease outstanding

750000

750000(20%)=150000

750000-150000=600000

Second republic Bank

600000

20%(600000)=120000

600000-120000=480000

Third fidelity bank

600000

120000

480000

600000 loans

750000-600000=150000