Answer:
Check the explanation
Explanation:
The first main street bank's check-able deposits reduce by $750,000.
To keep asset and liabilities equal under double entry bookkeeping, the first bank reduces its reserves by $750,000.
Since the required reserve ratio is 0.20 and the deposits have gone down by $750,000, the required reserves have gone down by $150,000 (= 0.20 x 150,000). But actual reserves have already gone down by $750,000, and therefore $600,000 (= $750,000 — $150,000)more reserves are required by the first main street bank to maintain the reserves as required. This maybe done by calling back loans.
Therefore, on the assets side of the bank's balance sheet, the withdrawal decreases reserves by $750,000. On the liabilities side, the withdrawal decreases check-able deposits by $750,000.
Because the required ratio is 20%, the $750,000 withdrawal decreases required reserves by $150,000. in order to maintain the required reserve ratio, the first main street bank must decrease its reserves by $600,000. One possible way to do so is to decrease its outstanding loans.
The first main street bank reduces its loans by cashing a check worth $600,000 (drawn by one of first main street bank's creditors) issued by second main street bank.
This means second main street bank' s check-able deposits reduce by $600,000 and therefore it now requires $480,000 1= $600,000 — 0.20($600,000)] to maintain the required reserves ratio. To do so, the second main street reduces its loans by cashing a check worth $480,000, drawn by one of second main street bank's creditors issued by third main street bank.
The chain of events goes on as it is arranged in the attached image below:
