Why do banks create money? Do they create money to help the Federal Reserve control the money supply or is there a more basic reason?
The real-world money multiplier is greater than the simple money multiplier (1/RR).
Suppose you withdraw $1,000 in cash from your checking account.Draw a T-account to show the effect of this transaction on your bank's balance sheet.
Suppose you deposit $4,000 in currency into your checking account at Bank of America.Assume that Bank of America has no excess reserves at the time you make your deposit and that the required reserve ratio is 10 percent. a.Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet. b.Suppose that Bank of America makes the maximum loan they can from the funds you deposited.Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan.Also include in this T-account the transaction from question (a.). c.Now suppose that whoever took out the loan in question (b)writes a check for this amount and that the person receiving the check deposits it in Bank of Boston.Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston,after the check has been cleared.On the T-account for Bank of America,include the transactions from questions (a)and (b). d.What is the maximum increase in checking account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.