Suppose that Tonya, a customer of Bank A, deposits $400 in cash from her piggy bank into her checkable account. Assume that the reserve requirement equals 5% for all checkable (transactions) deposits.
a. First, using the T-account below, show how this transaction affects Bank A’s assets and liabilities.
b. Now, suppose that Bank A loans all of its excess reserves and the loan is deposited into Bank B. Show how this loan deposit affects the balance sheet of both banks. Assume that Bank B does not immediately loan out its excess reserves.
c. Using the information in the balance sheets, compute the change in the money supply throughout the entire banking system caused by the initial $400 deposit. Assume all banks immediately loan any excess reserves