aplia ch 16 b7. The money creation processSupp.pdf

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aplia ch 16 b 7. The money creation process Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars)First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of_______ in demand deposits. (fill in the blanks). aplia ch 16 b 7. The money creation process Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars)First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of_______ in demand deposits. (fill in the blanks). Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars)First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successi.

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Assume this process continues, with each successive loan deposited into a checking account and
no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into
the money supply results in an overall increase of_______ in demand deposits. (fill in the
blanks).
aplia ch 16 b
7. The money creation process
Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately
uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking
account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess
reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third
Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter
each answer to the nearest dollar.
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)First Main Street Bank
Second Republic Bank

Third Fidelity Bank
Assume this process continues, with each successive loan deposited into a checking account and
no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into
the money supply results in an overall increase of_______ in demand deposits. (fill in the
blanks).
Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately
uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking
account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess
reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third
Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter
each answer to the nearest dollar.
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)First Main Street Bank

Second Republic Bank
Third Fidelity Bank
Assume this process continues, with each successive loan deposited into a checking account and
no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into
the money supply results in an overall increase of_______ in demand deposits. (fill in the
blanks).
Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately
uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking
account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess
reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third
Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter
each answer to the nearest dollar.
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)

(Dollars)
(Dollars)First Main Street Bank
Second Republic Bank
Third Fidelity Bank
Assume this process continues, with each successive loan deposited into a checking account and
no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into
the money supply results in an overall increase of_______ in demand deposits. (fill in the
blanks).
Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately
uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking
account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess
reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third
Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter
each answer to the nearest dollar.
Increase in Deposits
Increase in Required Reserves

Increase in Loans
(Dollars)
(Dollars)
(Dollars)First Main Street Bank
Second Republic Bank
Third Fidelity Bank
Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately
uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking
account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess
reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third
Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter
each answer to the nearest dollar.
Suppose First Main Street Bank loans out all of its new excess reserves to Cho, who immediately
uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking
account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess
reserves to Eric, who writes a check to Ginny, who deposits the money into her account at Third
Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Lucia as well.
Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter
each answer to the nearest dollar.
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)

(Dollars)First Main Street Bank
Second Republic Bank
Third Fidelity Bank
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)First Main Street Bank
Second Republic Bank
Third Fidelity Bank
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)

Second Republic Bank
Third Fidelity Bank
Solution
Fed has fixed reserve ratio as 3% of liabilities upto $14.5 million.
Here new deposits = $1.5 million, so we shall assume reserve ratio of 3%.
Based on this assumption,
(a) 1st bank gets deposits = $1,500,000
It will keep 3% as required reserve = $45,000 (= increase in reserves)
and will lend out balance 97% extra reserves = $1,455,000 to Cho
(b) Cho writes a check of $1,455,000 to Bob who deposits it in 2nd bank
So, 2nd bank gets additional deposit = $1,455,000
Out of which, reserves = 3% ( = $ 43,650)
and will lend out balance 97% ( = $1,411,350) to Eric
(c) Eric writes check of this amount to Ginny who deposits in 3rd bank.
So 3rd bank gets additional deposit = $1,411,350
Out of which reserves are 3% ( = $42,341)
And will lend out balance 97% ( = $1,369,009) to Lucia
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)
If this continues, money multiplier will be = (1 / reserve ratio) = (1 / 0.03) = 33.33
So an initial deposit of $1,500,000 will eventually create money supply of ($1,500,000 x 33.33)
= $49,995,000
Increase in Deposits
Increase in Required Reserves

Increase in Loans
(Dollars)
(Dollars)
(Dollars)First Main Street Bank1,500,00045,0001,455,000Second Republic
Bank1,455,00043,6501,411,350Third Fidelity Bank1,411,35042,3411,369,909

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Acct 221: Principles of Accounting II There are 27 questions in this exam. Upload the Answer Sheet when you complete the exam. For this exam, omit all general journal entry explanations. Be sure to include correct dollar signs, underlines and double underlines. Question 1 (15 points) Statement of Cash Flows The following is selected information from Murphy Company for the fiscal years ended December 31, 2015: Murphy Company had net income of $500,000. Depreciation was $50,000, purchases of plant assets were $ 250,000, and disposals of plant assets for $500,000 resulted in a $20,000 gain. Stock was issued in exchange for an outstanding note payable of $925,000. Accounts receivable decreased by $25,000. Accounts payable decreased by $10,000. Dividends of $200,000 were paid to shareholders. Murphy Company had interest expense of $5,000. Cash balance on January 1, 2015 was $250,000. Requirements: Prepare Murphy Company's statement of cash flows for the year ended December 31, 2015 using the indirect method. Hint (recall the 3 sections) Question 2 (10 points) On January 1, 2015, Baker Company purchased 10,000 shares of the stock of Murphy, and did obtain significant influence . The investment is intended as a long-term investment. The stock was purchased for $70,000, and represents a 25% ownership stake. Murphy made $20,000 of net income in 2015, and paid dividends of $10,000. The price of Murphy's stock increased from $20 per share at the beginning of the year, to $22 per share at the end of the year. Requirements: Prepare the January 1 and December 31 general journal entries for Baker Company. How much should the Baker Company report on the balance sheet for the investment in Murphy at the end of 2015? Question 3 (20 Points) On December 31, 2016, Murphy Inc. had the following balances (all balances are normal): Accounts Amount Preferred Stock, ($100 par value, 5% noncumulative, 50,000 shares authorized, 10,000 shares issued and outstanding) $1,000,000 Common Stock ($10 par value, 200,000 shares authorized, 100,000 shares issued and outstanding) $1,000,000 Paid-in Capital in Excess of par, Common 150,000 Retained Earnings 700,000 The following events occurred during 2016 and were not recorded: On January 1, Murphy declared a 5% stock dividend on its common stock when the market value of the common stock was $15 per share. Stock dividends were distributed on January 31 to shareholders as of January 25. On February 15, Murphy re-acquired 1,000 shares of common stock for $20 each. On March 31, Murphy reissued 250 shares of treasury stock for $25 each. On July 1, Murphy reissued 500 shares of treasury stock for $16 each. On October 1, Murphy declared full year dividends for preferred stock and $1.50 cash dividends for outstanding shares and paid shareholders on October 15. On December 15, Murphy split common stock 2 shares for 1. Net Income for 2016 was $275,000. Requirements: Prepare journal entries for the transactions listed above. Prepa.

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