Chapter 26

Barb's bank has $75,000 in deposits and $75,000 of reserves. It desires to keep as reserves only 25 percent of its deposits, so it has only $18,750 (25% of $75,000). Thus Barb's bank has excess reserves, reserves beyond the amount it is desires to hold, of $56,250.

Just like Art's bank, excess reserves do not thrill Barb's bank because the reserves earn it no income. So, Barb's bank is delighted when Bob comes in looking for a loan. As illustrated in the figure, the bank loans Bob the $56,250. Bob writes a cheque to Carl and then Carl deposits the cheque in his chequing account at bank. Hence as the figure shows, the $56,250 dollars ends up as an additional deposit in Carl's bank.

As you probably guessed, the tale is not yet over. Click on the figure below to get the next installment.