Consider the First National Bank that has only Deposits, Reserves and Loans in its balance sheet. Also, assume that it has Deposits = $500 as an initial deposit, while the reserve ratio is 10%. Set up the initial balance sheet structure of the FN Bank that includes Deposits, Reserves and Loans.
Explain and show through the balance sheet structure changes how the following transactions affect the money supply (M1):
Transaction 1:The initial Loan from the FN Bank it took by Mark who buys a car from a dealer. Use the balance sheet (T-accounts) to present the effects of this transaction on Mark and the car dealer, assuming that the dealer keeps money in the Second National Bank. How this transaction affects M1?
Transaction 2:Assume that another guy, Jack, comes to the Second National Bank and takes the loan in the amount available. He wants to buy machinery for construction (Bulldozer) from the Caterpillar factory. Use the balance sheet (T-accounts) to present the effects of this transaction on Jack and the Caterpillar factory, assuming that the factory keeps money in the Third National Bank. How this transaction affects M1?
Does this process stop eventually? Provide an intuition (and calculate) with respect how much money will be created out of the initial deposit ($500).
Draw the T-accounts and explain how these transactions affect the money supply
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