Imagine that you win $50,000 in the lottery (yay!). You decide to deposit all of it into “Bank #1”. All banks are required to keep 15% as reserves.
Draw the t-account for “Bank #1”. Be sure to label deposits, reserves, and loans. What would money supply be after Bank #1 makes the loan?
Suppose that Amy receives the loan from Bank #1 and spends all of it remodeling her kitchen. Amy pays Contractor Carrie and Carrie deposits the money into “Bank #2”. Draw the t-account for Bank #2. Be sure to label deposits, reserves, and loans. What would money supply be after Bank #2 makes the loan?
Suppose that Bill receives the loan from Bank #2 and spends all of it buying a boat. Bill pays Boatman Bob and Bob deposits the money into “Bank #3”. Draw the t-account for Bank #3. Be sure to label deposits, reserves, and loans. What would money supply be after Bank #3 makes the loan?
NOW, instead of drawing t-accounts again and again and again to determine how money banks can create with the initial $50,000, use the money multiplier to determine total money supply AND how much money the banks created.
