2. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25 In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total banks expansion of the money supply. Assume that all banks can immediately loan out all of their excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves loaned out are deposited into another bank.

3. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25 In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total banks expansion of the money supply. Assume that all banks can immediately loan out all of their excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves loaned out are deposited into another bank. If a stranger comes into Econvillle and deposits $2,000.00 into Bank 1: 1.How much will Bank 1 have to keep in reserve? 2. How much will Bank 1 be able to loan out as excess reserves?

4. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25 In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total banks expansion of the money supply. Assume that all banks can immediately loan out all of their excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves loaned out are deposited into another bank. 3. How much will be deposited into Bank 2? 4. How much will Bank 2 have to keep in reserve? 5. How much will Bank 2 be able to loan out as excess reserves? 6. How much will be deposited into Bank 3? 7. How much will Bank 3 have to keep in reserve? 8. How much will Bank 3 be able to loan out as excess reserves?

5. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25 In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total banks expansion of the money supply. Assume that all banks can immediately loan out all of their excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves loaned out are deposited into another bank. 9. How much will be deposited into Bank 4? 10. How much will Bank 4 have to keep in reserve? 11. How much will Bank 4 be able to loan out as excess reserves? 12. How much will be deposited into Bank 5? 13. How much will Bank 5 have to keep in reserve? 14. How much will Bank 5 be able to loan out as excess reserves?

6. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25 In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total banks expansion of the money supply. Assume that all banks can immediately loan out all of their excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves loaned out are deposited into another bank. 15. If this process continues what will eventually be the total expansion of the money supply? 16. How much of the money in question 15 was created by the banking system?

7. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25 In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total banks expansion of the money supply. Assume that all banks can immediately loan out all of their excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves loaned out are deposited into another bank. Answers: 1. $ 400; 2. $1,600; 3. $1,600; 4. $320; 5. $1,280; 6. $ 1,280; 7. $256; 8. $1,024; 9. $1,024; 10. $204.80; 11. $819.20; 12. $819.20; 13. $163.84; 14. $655.36 15. $10,000 (1/rr) (1/.20 = 5) ($2,000 x 5 = $10,000) 16. $8,000

8. Mr. Weiss Bank Expansion of Demand Deposits – Section 5 – Module 25