Suppose you deposit $5,000 in currency into your checking
account at a branch of PNC Bank, which we will assume
has no excess reserves at the time you make your deposit.
Also assume that the required reserve ratio is 0.10.
a. Use a T-account to show the initial effect of this
transaction on PNC’s balance sheet.
b. Suppose that PNC makes the maximum loan it can
from the funds you deposited. Use a T-account to
show the initial effect on PNC’s balance sheet from
granting the loan. Also include in this T-account
the transaction from part (a).
c. Now suppose that whoever took out the loan in part
(b) writes a check for this amount and that the person
receiving the check deposits it in Bank of America.
Show the effect of these transactions on the
balance sheets of PNC Bank and Bank of America
after the check has cleared. On the T-account for PNC
Bank, include the transactions from parts (a) and (b).
d. What is the maximum increase in checking account
deposits that can result from your $5,000 deposit?
What is the maximum increase in the money supply
that can result from your deposit? Explain.