No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eleven: Money, Money, Money! 266 The loan from BOT might have been given to Steve, who will purchase a new Miller welder for his auto body shop. Miller Welding will take his $810 check and deposit it in the Bank of Wisconsin as in Figure 11.11 . This results in an additional $810 of checkable deposits, or new money, into the economy courtesy of the Fed’s initial $1,000. Figure 11.8, Bank of Narnia T-Account-Interim and Final. To make the optimal return on their assets, Bank of Texas can lend all of their excess reserves ($900), increasing their assets and liabilities by $900. Once whoever borrowed the money spends it, BON’s reserves will decrease by $900 (and their $900 checkable deposit liability eliminated) leaving only the required 10% of their checkable deposit liability ($100). +$1000 +$1000 +$900 +$900 +$900 Reserves Loans Loans +$100 +$1000 Reserves Checking Account Checking Account Assets Liabilities Bank of Narnia (Initial) Assets Liabilities Bank of Narnia (Final) +$900 +$900 Reserves Checking Account Assets Liabilities Bank of Texas Figure 11.9, Bank of Texas T-Account. When Dell Computer cashes the check with their bank, the Bank of Texas, the bank’s reserves and liabilities both increase the same amount, in this case $900. +$900 +$90 +$810 Checking Account Reserves Loans Assets Liabilities Bank of Texas Figure 11.10, Bank of the Texas T-Account-Final. Bank of Texas will loan out up to 90% of their checkable deposits, or $810.