Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. The Federal Reserve buys a government bond worth $200,000 from Lorenzo, a client of First Main Street Bank. He deposits the money into his checking account at First Main Street Bank.

(a) Complete the following table to reflect any changes in First Main Street Bank's T-account (before the bank makes any new loans):

Assets (Dollars) Liabilities (Dollars)
Reserves ??? Deposits ???
(b) Complete the following table to show the effect of the new deposit on excess and required reserves when the required reserve ratio is 5%:

Amount Deposited (Dollars) Change in Required Reserves (Dollars) Change in Excess Reserves (Dollars)
200,000
(c) Now, suppose First Main Street Bank loans out all of its new excess reserves to Juanita, who immediately uses the funds to write a check to Gilberto. Gilberto 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 Lorenzo, who writes a check to Neha, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Teresa 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 (Dollars) Increase in Required Reserves (Dollars) Increase in Loans (Dollars)
First Main Street Bank
Second Republic Bank
Third Fidelity Bank
(d) Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under such assumptions, by how much will total demand deposits within the banking system increase? What is the increase in the money supply from the original $200,000 bond purchase by the Fed?