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:

Question

Quizplus · Accepted Answer

The Answer of 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:

Assume That a Banking System Starts from Scratch with the Following