MS = Currency + DD of Public Banks [thru loans] Create More DD

MS = Currency + DD of Public Banks [thru loans] Create More DD
Give me a loan so there will be more DD in the system. How Banks Create Money [MS] MS = Currency + DD of Public Banks [thru loans] Create More DD

How Banks Create Money [Objectives & Vocabulary]
1. Fractional Reserve Banking System – a fraction of DD are kept in reserve(say, 10%) at either the bank’s vault or at the Fed. 2. Vault cash cash held by a bank (banks rarely keep more than 2% of their in cash) 3. Required Reserve(RR) specified percentage of DD that banks must keep as RR. 4. Excess reserves total reserves(TR) RR. ER is what can be loaned out. Also some ER is used to meet sudden withdrawal demands. 5. Actual(Total) reserves RR + ER. 6. Deposit Multiplier one/RR or 1/.10 or $1/10 cents or 10 Multipliers 1/RR[$1/5 cents = 20] 1/5% = /25% = 4 1/10% = /33.3%= 3 1/12.5% = /40 = 2.5 1/20% = /50% = 2 7. Balance Sheet statement of assets & liabilities[assets=liabilities]. 8. Discount Rate when banks borrow from the Fed. [symbolic - emergencies] “wholesale price of money” 9. Federal Funds Rate banks borrow from other banks for overnight loans. 10. Prime Rate when a bank’s prime customers [good credit] get loans. “retail price of money” 11. Buying Bonds “buying” bonds means “bigger ” supply of money and “lower interest rates”. [So, more “C”, “Ig”, and “Xn” ] 12. Selling Bonds “selling” bonds mea ns “smaller” supply of money and “higher interest rates”. less “C”, “Ig”, and “Xn”] How Banks Create Money [Objectives & Vocabulary]

How Banks and Thrifts Create Money

Dennis Rodman deposits $1 with A 10% RR One bank’s loan becomes
Rodman’s .10 90 cents RR Excess Reserves Total (Actual) Reserves One Dollar One bank’s loan becomes another bank’s DD. PMC = M x ER, so 10 x .90 =$9 TMS = PMC[$9] + DD[$1] = $10 [MS = Currency + DD of Public]

Excess Reserves RR One Dollar Total(Actual) Reserves One Dollar
Rodman’s Bank Borrows $1 From The Fed [10% RR] Rodman’s Bank Fed One Dollar RR Excess Reserves Total(Actual) Reserves One Dollar PMC = M x ER, so 10 x $1 = $10 TMS [$10] = PMC[$10] [MS = Currency + DD of Public]

BALANCE SHEET OF A COMMERCIAL BANK
ASSETS [cash] = LIABILITIES[DD] [The cash is property of the bank] [“liable”, DDs are owed to depositors] Cash $100, DD $100,000 The Goldsmiths Fractional Reserve Banking System Money Creation & Reserves [The current 10% RR is kept in a bank’s vault or in a Fed vault.] Bank Panics and Regulation

Money Creation

$1,000 DD by Calli [MS=Currency+DD of Public]
New Deposits [New Reserves] DD New Required Reserves RR=10% DD Created By New Loans [equal to new ER] Bank Dog that can YoYo $1,000.00 A $100.00 900.00 900.00 One year “all u can eat” hot wings at Hooters B 900.00 $90.00 810.00 C 810.00 $81.00 729.00 $ for a “cat bodyguard” D 729.00 $72.90 656.10 PMC = ER[$900] x M[10] PMC = $9,000.00 Smoking cat Erin’s DD PMC = TMS $1, $9, = $10,000.00 MS grows by multiple of 10

$1,000 DD by Marie [MS=Currency+DD of Public]
Hair care for 1 year New Deposits [New Reserves] DD New Required Reserves RR=20% DD Created By New Loans [equal to new ER] Bank Purchase of a donkey $1,000.00 A $200.00 800.00 800.00 B 800.00 $160.00 640.00 C 640.00 $128.00 512.00 Two Monkeys D 512.00 $102.40 409.60 PMC = ER[$800 x M[5] PMC = $4,000.00 A chauffeur dog Marie’s DD PMC = TMS $1, $4, = $5,000.00 MS grows by multiple of 5

Teach Stuart Little how
$1,000 DD by Emily [MS=Currency+DD of Public] Shark to keep in bathtub New Deposits [New Reserves] DD New Required Reserves RR=25% DD Created By New Loans [equal to new ER] Bank $1,000.00 Prom date w. Linda Blair A $250.00 750.00 750.00 B 750.00 $188.00 562.00 Frog with teeth C 562.00 $140.00 422.00 Teach Stuart Little how to brush his teeth D 422.00 $105.00 317.00 E 317.00 $80.00 237.00 Cat with human teeth PMC = ER[$750] x M[4] PMC = $3,000.00 Em’s DD PMC = TMS $1, $3, = $4,000.00 MS grows by multiple of 4

MS is MS MS RR=20% $10,000 RR = 20% $10,000 $8,000 $6,400 $24,400
MS = DD + Currency of the Public [A DD of $10,000 will increase MS by another $40,000($50,000 MS] RR=20% MS $10,000 $8,000 $6,400 $24,400 MS is $10,000 4. 2nd Bank lends Sports Shop $6,400. 1. Joe Biker deposits $10,000 in his bank. RR = 20% MS $10,000 $8,000 $18,000 2. Suzie Rah Rah borrows $8,000 5. Eventually the MS will be $50,000 Joe 3. Suzie pays $8,000 for a new car. GoNow Auto deposits the $ in 2nd Bank. $10,000+$40,000=$50,000

Most Famous “Panic Run” in Movie History

Another Famous “Panic Run” in Movie History
The children wanted to use their tuppance to buy bread crumbs to feed the pigeons, instead of investing it at the bank. When they said, “We want our money”, the other depositors thought it was a “bank run”. [nominated for a record 13 academy awards - won 6]

History of Deposit Insurance
In , federal deposit insurance made its debut at $2,500 to protect the average family’s savings and end the bank runs that had shut down businesses and contributed to the Great Depression. Through the years the coverage rose in $5,000 increments until the 70s when it jumped to $40,000. In 1980, it was raised to $100,000.

The Very Early Days Of Banking
Greatest invention since sliced bread “Wow, you mean we can create money out of thin air.?” There were more claims to gold than there were ounces of gold. The fractional banking system began when someone issued claims for gold that already belonged to someone else. Once upon a time there was a gold-smithy who offered to store people’s gold in his vault. He issued paper receipts for the gold, and it was not long before the townsfolk used the paper to purchase eggs and beer. The smithy’s paper receipts [first checks] became as “good as gold.” Our Smithy was not stupid. He said to himself. “I have 2000 ounces of gold stored in my vault, but in the last year I was never called upon to pay out more than 100 ounces in a single day. What harm could it do if I lent out say, half the gold I now have? I’ll still have more than enough to pay off any depositors that come in for a withdrawal. No one will know the difference. I could earn 30 additional ounces of gold each week. I think I’ll do it.” “The smithy has invented the Fractional Reserve Banking System.” Advantages of Lending [One disadvantage was the possibility of “bank runs”] 1. Depositors haven’t lost money [Goldsmiths paid them instead of other way] 2. With the interest you earned you could give some to depositors. 3. The loans benefited the community thru loans

FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
ASSETS LIABILITIES & NET WORTH [owe] [own] TRANSACTION 1 Creating a bank $250,000 Cash for Capital Stock

ASSETS [own] LIABILITIES & NET WORTH [owe] Cash $250,000 Capital Stock $250,000 Deposit Added to Vault Cash

ASSETS [own] LIABILITIES & NET WORTH [owe] Cash $250,000 Capital Stock $250,000 TRANSACTION 2 Acquiring Property and Equipment $240,000 Cash

Birth OF A COMMERCIAL BANK
In Lovelady, Texas ASSETS [own] LIABILITIES & NET WORTH [owe] Cash $ 10,000 Property ,000 Capital Stock $250,000 Lovelady Bank

Lovelady Bank ASSETS LIABILITIES and NET WORTH Cash $ 10,000 Property ,000 Capital Stock $250,000 $250,000 $250,000 TRANSACTION 3 Accepting Deposits $100,000 Cash

Lovelady Bank ASSETS LIABILITIES and NET WORTH [Was $10,000] Cash $110,000 Property $240,000 DD $100,000 Capital Stock ,000

Lovelady Bank ASSETS LIABILITIES and NET WORTH [Was $10,000] Cash $110,000 Property ,000 DD $100,000 Capital Stock ,000 $350,000 $350,000

Lovelady Bank ASSETS LIABILITIES & NET WORTH Cash $110,000 Property ,000 DD $100,000 Capital Stock ,000 $350,000 $350,000 TRANSACTION 4 A $50,000 check is written against the bank

Cash $ 60,000 Property 240,000 DD $ 50,000 Capital Stock 250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank ASSETS LIABILITIES & NET WORTH [was $110,000] Cash $ 60,000 Property ,000 DD $ 50,000 Capital Stock ,000 $300,000 $300,000

NOTES: Banks create money by lending ER and destroy money by loan repayment. Purchasing bonds from the public also creates money.

TRANSACTION 5 Make a loan from excess reserves of $50,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank ASSETS LIABILITY and NET WORTH Cash $ 60,000 Property ,000 DD $ 50,000 Capital Stock ,000 TRANSACTION 5 Make a loan from excess reserves of $50,000

Lovelady Bank ASSETS LIABILITIES and NET WORTH Cash $ 60,000 Loans ,000 Property ,000 DD $100,000 Capital Stock ,000 Making the loan created money!

Lovelady Bank ASSETS LIABILITIES AND NET WORTH Cash $ 60,000 Loans Property ,000 DD $ 50,000 Capital Stock ,000 After a check for the $50,000 is written against the bank

(a) Joe Bozo pays Best Buy a $50,000 check
Dallas Big “D” Lovelady Bank Hateman Bank (a) Joe Bozo pays Best Buy a $50,000 check

And What Happens If A Turtle Doesn’t Keep Up with His Mortgage Payments

This turtle is subject to foreclosure on his house.
Here, he has lost his house. This turtle is subject to foreclosure on his house.

Lovelady Bank ASSETS LIABILITIES and NET WORTH Reserves $ 10,000 Loans ,000 Property ,000 DD $ 50,000 Capital Stock ,000 TRANSACTION 6 Repaying a loan with cash $50,000

Lovelady Bank ASSETS LIABILITIES and NET WORTH Reserves $ 10,000 Loans Property ,000 DD $ 0 Capital Stock ,000 $50,000 in money supply is destroyed!

MULTIPLE DEPOSIT EXPANSION PROCESS
RR= 20% Bank Acquired reserves and deposits Required reserves Excess Amount bank can lend - New money created A B C D E F G H I J K L M N Other banks $100.00 80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 21.97 $20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40 $80.00 17.57 1st 10 $357 of the $400 P MC in the banking system [MxER] $400.00 TMS = $500.00

THE Money [Deposit] MULTIPLIER
MM RR 1 = The MM is the reciprocal of the RR. Potential money Creation in the Banking System [PMC] Maximum checkable- deposit expansion = ER x MM

Ashley Olsen Deposits $1,000 in her bank
RR = 25% $1,000 New reserves Ashley Olsen’s $750 Excess reserves $250 RR Ashley Olsen deposits $1,000 $3,000 PMC thru bank lending $1,000 Initial Deposit TMS = $4,000

Fed Buys A $1,000 Bond From Ashley’s Bank
New reserves Ashley Olsen’s $1,000 Excess Reserves 25% RR $4,000 PMC thru Bank Lending TMS is $4000

NS 31-35 AP Econ [MS = Currrency + DD of Public]
RR+ER=TR; TR-RR=ER; TR-ER=RR; MXER=PMC; PMC(Public)+DD=TMS; PMC(Fed)=TMS Excess Reserves prior to new currency deposit (DD) = $0 Britney Spears deposits in the banking system = $40 million Legal Reserve Requirement [RR] = 20% 31. The $40 million deposit of Currency into DD would result in MS staying at ($8/$40/$160) million. [MS composition changed from currency to DD] 32. The $40 million deposit of currency into checking accounts will create ER of ($20/$32/$40) million. 33. The Potential Money Creation of the banking system through loans is ($40/$160/$$200) mil. The Potential TMS [all DD of the public] could be as much as ($40/$160/$200) mil. 34. The RR applies to checkable deposits at (banks/S&Ls/ credit unions/ all depository institutions). 35. If the Duck National Bank has ER of $6,000 & DD of $100,000 what is the size of the bank’s TR if the RR is 25%? ($25,000/$75,000/$31,000) [RR($____)+ER($___)+TR($____) 25,000 6,000 31,000

NS 36-45 [MS = Currrency+DD of Public]
36. A stranger deposits $1,000 in a bank that has a RR of 10%. The maximum possible change in the dollar value of the local bank’s loans would be $______. PMC[M X ER] in the banking system is $_____. Potential TMS could become as high as $_______. 37. Suppose a commercial bank has DD of $100,000 and the RR is 10%. If the bank’s RR & ER are equal, then its TR are ($10,000/$20,000/$30,000). 38. Total Reserves (minus/plus) RR = ER. 39. Suppose the Thunderduck Bank has DD of $500,000 & the RR is 10%. If the institution has ER of $4,000 then its TR are ($46,000/$54,000/$4,000). 40. If ER in a bank are $4,000, DD are $40,000, & the RR is 10%, then TR are ($4,000/$8,000). 41. The main purpose of the RR is to (have funds for emergency withdrawals/ influence the lending ability of commercial banks). 42. If I write you a check for $1 & we both have our checking accts at the Poorman Bank, the bank’s balance sheet will (increase/decrease/be unchanged). 43. Banks (create/destroy) money when they make loans and repaying bank loans (create/destroy) money. 44. When a bank loan is repaid the MS is (increased/decreased). 45. The Fed Funds rate is a loan by one bank (to another bank/from the Fed). RR+ER=TR; TR-RR=ER; TR-ER=RR; MXER=PMC; PMC(Public)+DD=TMS; PMC(Fed)=TMS 900 9,000 10,000

NS 46-47 [MS = Currrency+DD of Public]
RR+ER=TR; TR-RR=ER; TR-ER=RR; MXER=PMC; PMC(Public)+DD=TMS; PMC(Fed)=TMS 46. If the RR was lowered [say, from 50% to 10%], the size of the monetary multiplier [MM] would (increase/decrease). Leakages (limitations) of the Money Creating Process 1. Cash leakages [taking part of loan in cash] 2. ER (banks don’t loan it or we don’t borrow] 47. If borrowers take a portion of their loans as cash, the maximum amount by which the banking system increases the MS by lending will (increase/decrease).

Money Supply = DD + Currency of the Public
“PMC” “PMC” “TMS” ER Loans Crea. In “Potential” $100[10% RR] [1st Bank] [1st Bank] System Total MS Banks/Public DD [$100] $ $ $ $1,000 Fed /Public/Banks DD[$100] $ $ $ $1,000 [*Fed buys bonds from public who put the money in their DD] Banks/Fed Fed Loan[$100] $ $100 $1, $1,000 [or sells bonds to Fed] “PMC” “PMC” “TMS” ER Loans Crea. In “Potential” $100 [20% RR] [1st Bank] [1st Bank] System Total MS Banks/Public DD [$100] $ $ $ $500 Fed/Public/Banks DD [$100] $ $ $ $500 [*Fed buys bonds from public who put the money in their DD] Banks/Fed Fed Loan[$100] $ $ $ $500 Short Run Long Run

Sanjaya Deposits $1,000 In His Bank
[RR is 20%] New reserves Sanjaya’s $800 Excess Reserves $200 RR Sanjaya [member of the public] $4000 PMC thru Bank Lending $1000 Initial Deposit TMS is $5,000

$5,000 20% RR TMS is $5000 Fed buys a $1,000 Bond from Sanjaya’s Bank
New reserves 20% RR Fed $1,000 Excess Reserves Sanjaya’s $5,000 PMC thru Bank System Lending TMS is $5000

Eva Longoria Deposits $1 with a 20% RR Total(Actual) Reserves
Eva Longoria’s .20 80 cents RR Excess Reserves Total(Actual) Reserves One Dollar PMC = M x ER, so 5 x .80 = $4 TMS = PMC[$4] + DD[$1] = $5 [MS = Currency + DD of Public]

Eva’s Bank Borrows $1 From The Fed [20% RR] Total(Actual) Reserves
Eva Longoria’s One Dollar RR Excess Reserves Total(Actual) Reserves One Dollar PMC = M x ER, so 5 x $1 = $5 TMS [$5] = PMC [$5] [MS = currency + DD of Public]

Money Creation Practice Review

$1,000 DD by Katy [MS=Currency+DD of Public]
Duck that can dance New Deposits [New Reserves] DD New Required Reserves RR=50% DD Created By New Loans [equal to new ER] Dance Lessons w. Laura Bush Bank $5,000.00 A $2,500.00 2,500.00 2,500.00 B 2,500.00 $1,250.00 1,250.00 Hunting with Dick Cheney C 1,250.00 $625.00 625.00 D 625.00 $312.50 312.50 Prom Dance lessons with N. Dynamite PMC = $5,000.00 PMC = ER[$2,500 x M[2] Katy’s DD PMC = TMS $5, $5, = $10,000.00 MS grows by multiple of 2

[MS = Currency + DD of public]
Money Creation Formulas [MS = Currency + DD of public] RR + ER = TR TR - RR = ER TR - ER = RR Public Public: Student deposits $1.00 in a bank 1. ER [DD-RR] x MM = PMC 2. PMC + 1st DD =TMS Fed No Public: [Fed gives $1.00 loan to a bank] ER x MM = PMC & TMS

Banks and the Fed [RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=TMS] MS = Currency + DD of Public [Money borrowed from the Fed [or gained thru bond sales] is ER & can be loaned out] 9. RR is 25%; Econ Bank borrows $25,000 from the Fed; its ER are increased by $______. Potential Money Creation in the system is $_______. Potential TMS is $_______. 10. RR is 50%; a bank borrows $20,000 from the Fed; this one bank’s ER are increased by $_____. Potential Money Creation in the system is $______. Potential TMS is $______ 11. RR is 20%; the Duck Bank sells $10 M of bonds to the Fed; Duck Bank’s ER are increased by $___million. PMC in the system is $__________. TMS is $__________. 12. RR is 20%; Fed buys $50,000 of securities from Keynes Bank. Its ER are increased by $___________. Potential Money Creation in the banking system is $______________. Potential TMS is $___________. 13. 25% RR; Fed buys $400 million of bonds from the Friar Bank. This one bank’s ER are increased by $_____million. 14. RR is 50%; the Fed sells $200 million of bonds to a bank; its ER are (increased/decreased) by $_______. Potential Money Creation in the banking system is (increased/decreased) by $________. 15. RR is 10%; a bank borrows $10 million from the Fed; this one bank’s ER are increased by $_______ million. PMC in the banking system is $_______million. Potential TMS is $_______million. 25,000 100,000 100,000 20,000 40,000 40,000 10 50 million 50 million 50,000 250,000 250,000 400 200 M 400 M 10 100 100

MS = currency + DD of Public
Banks and the Public RR+ER=TR; TR-RR=ER; TR-ER=RR; M x ER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=TMS Banks & Public (all DD of Public are subject to the RR; rest is ER & can be loaned out) 1. No ER & RR is 20%; DD of $10 M is made in the Thunder Bank. MS is $___million. ER increase by $___million. Potential Money Creation in the banking system is $_____M. Potential TMS is $____million. 2. There are no ER & RR is 25% & $16,000 is deposited in the Duck Bank. MS is $_______. This one bank can increase its loans by a maximum of $_______. Potential Money Creation in the banking system is $_______. Potential Total Money Supply could be $__________. 3. Econ Bank has ER of $5,000; DD are $100,000; RR is 25%. TR are $_______. 4. DD are $10,000; ER are $1,000; TR are $3,000; RR are _________. [TR-ER=RR]. 5. Nomics Bank has ER of $10,000; DD of $100,000; RR of 40%. TR are _________. With ER above, Potential Money Creation in the banking system is $__________. 6. Friar Bank has DD of $100,000; RR is 20%; RR & ER are equal. TR are $________. 7. If ER in a bank are $10,000; DD are $200,000, & the RR are 10%. TR are $_______. 8. No ER & RR is 25%. DD of $100,000 is made. MS is $_______. This single bank can increase its loans by $_______. PMC in the system is $________. TMS is $________. MS = currency + DD of Public 10 8 40 50 16,000 12,000 48,000 64,000 30,000 $2,000 $50,000 25,000 40,000 30,000 100,000 75,000 300,000 400,000

Fed and the Public $10 M $200 M $100 M $400 M $5 M $4 M $20 M $25 M
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=TMS] MS = Currency + DD of the Public [When Fed buys securities from Public, they will put the money in their DD] 16. RR is 50%; Fed buys $10 M of bonds from the Public. MS is increased by _______. ER are increased by ____. PMC in the system is _______. Potential TMS is _______. 17. RR is 25%; Fed buys $100 M of bonds from the Public. The MS is increased _______. ER are increased by ______. PMC in the system is _______. Potential TMS is ________. 18. RR is 50%; Fed sells $200 M of bonds to the Public. The MS is (incr/decr) by __________. ER are (incr/decr) by _________. PMC in the banking system is (increased/decreased) by _______. Potential TMS is (incr/decr) by __________. 19. RR is 20%; Fed buys $5 million of securities from the Public. The MS is increased by _______. ER are increased by _______. Potential Money Creation in the banking system is _______. Potential TMS is _________. 20. RR is 10%; Fed buys $50 million of bonds from the Public. The MS is increased by _______. ER are increased by _______. PMC in the banking system is __________. Potential Total Money Supply is __________. $10 M $5 M $10 M $20 M $100 M $75 M $300 M $400 M $200 M $100 M $400 M $200 M $5 M $4 M $20 M $25 M $50 M $45 M $450 M $500 M

1. The RR is 20% & Boo Radley deposits $10,000 in the Econ Bank
that he has been saving in a coffee can in a tree. The impact of this transaction on the ER of the Econ Bank & the potential increase in the money supply would be: [Remember: MS = Currency + DD of public] (A) ER would increase by $10,000 & the maximum increase in TMS would be $50,000. (B) ER would increase by $8,000 & the maximum increase in TMS would be $50,000 (C) ER would increase by $8,000 & the maximum increase in MS would be $40,000 (D) ER would increase by $10,000 & the maximum increase in MS would be $40,000. (E) ER would increase by $40,000 & the maximum increase in MS would be $50,000. Boo The MS [Cash or DD of the public] was $10,000 cash. When he deposited the $10,000, the Econ Bank could loan out ER of $8,000. The $8,000 x MM of 5 became $40,000 for TMS of $50,000. So, $10,000 MS of cash increased MS by $40,000 to get the total money supply of $50,000. Boo 1. RR is 20% & Boo Radley’s Bank borrows $10,000 from the Fed. The impact of this loan on the bank’s ER and then TMS are: [Remember again: MS = Currency + DD of public] (A) ER would increase by $10,000 & the maximum increase in TMS would be $50,000. (B) ER would increase by $8,000 & the maximum increase in TMS would be $50,000 (C) ER would increase by $8,000 & the maximum increase in MS would be $40,000 (D) ER would increase by $10,000 & the maximum increase in MS would be $40,000. (E) ER would increase by $40,000 & the maximum increase in MS would be $50,000. All of the $10,000 loan would be ER. Boo Bank could loan it all out so it could result in a PMC and TMS of $50,000. [MM of 10 x $10,000 = $50,000]

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal RR is 10%. If Emilia deposits the $100 bill she received as a graduation gift from her grandfather into her checking account, the maximum increase in the total money supply will be a. $10 b. $100 c. $900 d. $1,000 e. $1,100 Remember that currency is also MS. So, the $100 bill was MS when this began. When little Emilia deposited the $100, the composition of the MS didn’t increase. It just changed from currency to DD. Now, with the RR at 10%, $90 was loaned by the first bank and with a MM of 10, the MS increased by $900 more as the TMS eventually became $10,000.

Commercial Banks Fed Public
[MS=Curr. + DD of Public] [RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1stDD=TMS; PMC(Fed)=TMS] 1. The Hale Bank [with no ER] borrows $100,000 from the Fed. With RR of 50% the Hale Bank can increase its loans by a maximum of __________. PMC in the banking system is __________. Potential TMS is ______________. 2. The Davis Bank has DD of $10,000; RR is 10%; RR & ER are equal. TR are ______. 3. RR is 20%; Fed buys $50,000 of securities from the public [Sarah Palmer] PMC in the banking system is __________. Potential TMS is ____________. 4. RR is 40%; Buzon Bank borrows $1 million from the Fed. This bank can increase its loans by a maximum of _______ __. PMC is __________. TMS is __________. 5. RR is 10% & there are no ER; $10,000 is deposited in the Rodriquez Bank. This bank can increase its loans by a maximum of __________. Possible Money Creation in the banking system is ___________. Potential TMs is _____________. 6. There are no ER in the Vehslage Bank. Nicole now deposits $ With a RR of 20%, PMC in the system is __________. Potential TMS is ___________. 7. The Terrones Bank has a RR of 50%; the Fed buys $50 million of bonds from this bank. PMC in the system is __________. Potential TMS is __________. 8. Marin Bank has ER of $50,000; DD of $100,000, & a RR of 20%. TR are ________. 9. RR is 40%; the Collins Bank borrows $10 million from the Fed. This bank’s ER are increased by _________. PMC is __________. Potential TMS is ___________. 10. RR is 10%; Tran Bank borrows $5 from the Fed; the Tran Bank’s ER are increased by _______. PMC is __________. Potential TMS is __________. Practice Money Quiz Commercial Banks Fed Public $100,000 $200,000 $200,000 $2,000 $200,000 $250,000 $1 million $2.5 mil. $2.5 M $9,000 $90,000 $100,000 $40.00 $50.00 $100 M $100 M $70,000 $10 M $25 M $25 M $5.00 $50.00 $50.00

Money Quiz 1 Banks Fed Public [MS = Currency + DD of Public] $1.00
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=PMC] 1. RR is 25% & the Boase Bank has no ER. Geof deposits(DD) $100,000 there. This bank can increase its loans by a maximum of ______. PMC is ______. TMS is _______. 2. RR is 50%; the Stansbury Plaza Bank borrows $100,000 from the Fed. This one bank can increase its loans by a maximum of ________. PMC is _______. TMS is ________. 3. RR is 25%; Fed buys $100,000 of securities from the public [Mary Gangel]. Potential Money Creation in the system is ________. Potential TMS is _________. 4. The Curtis Bank has DD of $200,000; RR is 10%; RR & ER are equal. TR are _______. 5. The Recsnik Bank, with no ER, borrows $200,000 from the Fed. With a RR of 10%, this bank can increase its loans by _________. PMC in the system is __________. 6. RR is 20%; the Morell Bank borrows $1 from the Fed; this bank can increase its loans by a maximum of _________. PMC in the banking system is __________. 7. RR is 50%; the Cusimano Bank borrows $1 million from the Fed; this bank’s ER are increased by _______. PMC in the system is __________. TMS is __________. 8. The Masters Bank has ER of $20,000; DD of $200,000, & a RR of 10%. TR are ______. 9. RR is 25%; Fed buys $100 million of bonds from the Green Bank. Potential Money creation in the banking system is ________. Potential TMS is ____________. 10. There are no ER in the Farrell Bank. Erin deposits $2.50. With RR of 20%, PMC in the banking system is ____________. Potential TMS is _____________. Money Quiz 1 Banks Fed Public $100,000 $75,000 $300,000 $400,000 $100,000 $200,000 $200,000 $300,000 $400,000 $40,000 $200,000 $2 million $1.00 $5.00 $1 mil. $2 million $2 million $40,000 $400 mil. $400 million $10.00 $12.50

Commercial Banks Fed Public
[MS = Curr. + DD of Public] [RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC;PMC(Public)+1st DD=TMS; PMC(Fed)=TMS] 1. RR is 5% & there are no ER in the Vehslage Bank. Trey deposits[DD] $1.00 there. This one bank can increase its loans by a maximum of _______. 2. RR is 25%; the Rigal Bank borrows $1 million from the Fed. This one bank can increase its loans by a maximum of ____________. 3. RR is 50%; the Fed buys $100,000 of securities from the public [Kate Wells]. Potential Money Creation in the banking system is ____________. 4. The Secker-Dog Killing Bank has DD of $400,000; RR is 10%; RR & ER are equal. TR are ____________. 5. The Terrones Bank , with no ER, borrows $500,000 from the Fed. With a RR of 10%, how much can this single bank increase its loans? ____________ 6. RR is 20%; the Fed buys $25,000 of securities from the public [Natalie Marin]. 7. RR is 20%; the Rodriquez-Loser Bank borrows $1 million from the Fed. This single bank’s ER are increased by ____________. 8. RR is 25%; Fed buys $200 million of securities from the public [Rose]. Potential Total Money Supply[TMS] could be as much as _______________. 9. The RR is 25% & the Fed buys $10 million of bonds from the Hicks Bank. Potential Money Creation in the banking system could be ____________. 10. There are no excess reserves in the Stansbury Bank. With RR of 50%, Courtney deposits [DD] $50.00 there. Potential Money Creation in the system is _________. Money Quiz 2 Commercial Banks Fed Public .95 $1 million $100,000 $80,000 $500,000 $100,000 $1 million $800 million $30 million $50.00

Additional Practice on Money Creation
RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC[Public]+1st DD=TMS; PMC[Fed]= TMS 1. If the RR is 40% and the Fed buys $100 M of bonds from the public [Sarah], then the MS is increased by _______. ER are increased by ______. PMC is _______. TMS would be ______. 2. RR is 50% and the Bolding Bank borrows $100 M from the Fed. As a result, RR are increased by ______. ER is increased by _______. PMC and TMS is increased by ________. 3. Collins Bank has DD of $400,000 and the RR is 25%. If RR and ER are equal, then TR are _______. 4. The Tran Bank has ER of $60,000 & DD is $200,000. If the RR is 20%, TR are _________. 5. RR is 20% & the Fed buys $50 million of bonds from the public [Geof B.]. The MS is increased by _______. ER are increased by _______. PMC is _______. TMS would be _________. $100 M $60 M $150 M $250 M $100 M $200 M $200,000 $100,000 $50 M $40 M $200 M $250 M Banks Public Fed

Money Creation Problems from the 2005 Macro MC Exam
(87%) 40. Under a fractional reserve banking system, banks are required to a. keep part of their demand deposits as reserves b. expand the money supply when requested by the central bank c. insure their deposits against losses and bank runs d. pay a fraction of their interest income in taxes e. charge the same interest rate on all their loans (72%) 41. If a commercial bank has no ER and the RR is 10%, what is the value of new loans this single bank can issue if a new customer deposits $10,000? a. $100, b. $90, c. $10, d. $9,000 e. $1,000 Assets Liabilities Total Reserves: $15, DD: $100,000 Securities: $70,000 Loan: $15,000 (37%) 42. A commercial bank is facing the conditions given above. If the RR is 12% and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is a. $15, b. $12, c. $3, d. $1, e. 0 (53%) 43. Assume the RR is 20%, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in an increase in the MS of $5 million c. decrease in MS of $1 million an increase in the MS of less than $5 million d. decrease in the MS of $5 million e. a decrease in the MS of more than $5 million The TR: $15,000, Securities: $70,000, and Loan: $15,000 total up to the $100,000 DD. This bank would have to keep $12,000 of their $100,000 in RR. With TR of $15,000, they have $3,000 in ER to loan. They could increase MS by $5 M, but they are keeping some in ER, so MS will increase by less than $5 million.

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MS = Currency + DD of Public Banks [thru loans] Create More DD

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MS = Currency + DD of Public Banks [thru loans] Create More DD

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Presentation on theme: "MS = Currency + DD of Public Banks [thru loans] Create More DD"— Presentation transcript:

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