1 SCENARIO 3:Fractional-Reserve Banking If this $640 is eventually deposited in Thirdbank, then Thirdbank will keep 20%of it in reserve,and loan the rest out: THIRDBANK'S balance sheet Assets Liabilities reserves $128 deposits $640 loans $512 CHAPTER 18 Money Supply and Money Demand slide 10
CHAPTER 18 Money Supply and Money Demand slide 10 SCENARIO 3: Fractional-Reserve Banking THIRDBANK’S balance sheet Assets Liabilities reserves $640 loans $0 deposits $640 ▪ If this $640 is eventually deposited in Thirdbank, ▪ then Thirdbank will keep 20% of it in reserve, and loan the rest out: reserves $128 loans $512 1
Finding the total amount of money: Original deposit =$1000 X Firstbank lending =$800 Secondbank lending =$640 十 Thirdbank lending =$512 other lending. Total money supply =(1/rr)x $1000 wherer ratio of reserves to deposits In our example,rr=0.2,so M=$5000 CHAPTER 18 Money Supply and Money Demand slide 11
CHAPTER 18 Money Supply and Money Demand slide 11 Finding the total amount of money: Original deposit = $1000 + Firstbank lending = $ 800 + Secondbank lending = $ 640 + Thirdbank lending = $ 512 + other lending. Total money supply = (1/rr ) $1000 where rr = ratio of reserves to deposits In our example, rr = 0.2, so M = $5000 1