SCENARIO 3:Fractional-Reserve Banking Suppose banks hold 20%of deposits in reserve, making loans with the rest. Firstbank will make $800 in loans. FIRSTBANK'S The money supply now equals $1800: balance sheet Assets Liabilities The depositor still has $1000 in reserves $200 deposits $1000 demand deposits, loans $800 but now the borrower holds $800 in currency. CHAPTER 18 Money Supply and Money Demand slide 7CHAPTER 18 Money Supply and Money Demand slide 7 SCENARIO 3: Fractional-Reserve Banking The money supply now equals $1800: The depositor still has $1000 in demand deposits, but now the borrower holds $800 in currency. FIRSTBANK’S balance sheet Assets Liabilities deposits $1000 ▪ Suppose banks hold 20% of deposits in reserve, making loans with the rest. ▪ Firstbank will make $800 in loans. reserves $1000 reserves $200 loans $800 1