Suppose that a lottery winner deposits $12 million in cash into her transactions account at the Bank of America (B of A). Assume a reserve requirement of 20 percent and no excess reserves in the banking system prior to this deposit.
Use step 1 in the following T-accounts to show how her deposit affects the balance sheet at B of A.
Has the money supply been changed by her deposit?
Use step 2 here to show the changes at B of A after the bank fully uses its new lending capacity.
Has the money supply been changed in step 2?
In step 3 the new borrower(s) writes a check for the amount of the loan in step 2. That check is deposited at another bank, and B of A pays the other bank when the check clears. What does the B of A balance sheet look like now?
After the entire banking system uses the lending capacity of the initial ($12 million) deposit, by how much will the following have changed?
Total reserves
Total deposits
Total loans
Cash held by public
The money supply