Reference no: EM131728127

Suppose First Main Bank, Second Main Bank, and Third Main Bank all hold zero excess reserves. The required reserve ratio is 20%. Suppose that the Federal Reserve buys a government bond worth $1,500,000 from Jack, a client of First Main Bank. He immediately deposits the money into his checking account at First Main Bank. As a result of this transaction, the required reserves for First Main Bank will increase by $ ________ and its excess reserves will increase by $____________

Now suppose that First Main Bank loans out all of its new excess reserves to Frances, who immediately uses the funds to write the check to Mitch. Mitch deposits the funds immediately into his checking account at Second Main Bank. Then Second Main Bank lends out all of its new excess reserves to Javier, who writes a check to Juanita, who deposits the money into her account at Third Main Bank.  Given the following chain of events, the required reserves at Third Main Bank increased by $ _____________

Suppose the required reserve ratio is 20% and that the Federal Reserve buys a government bond worth $1,500,000 from Jack, a client of First Main Bank. Under these assumptions, the purchase by the Fed of $1,500,000 worth of bonds will increase money supply in the banking system by $ ______________________