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

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Presentation on theme: "How Banks Create Money [ MS ] MS = Currency + DD of Public Banks [thru loans] C reate M ore DD Give me a loan so there will be more DD in the system."— Presentation transcript:

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

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4 How Banks and Thrifts Create Money

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

6 Excess Reserves Total(Actual) Reserves PMC = M x ER, so 10 x $1 = $10 TMS [$10] = PMC[$10] [ MS = Currency + DD of Public ] Rodmans Bank Borrows $1 From The Fed [10% RR] RR One Dollar Rodmans Bank 0 One Dollar One Dollar Fed

7 BALANCE SHEET OF A COMMERCIAL BANK ASSETS [cash]LIABILITIES[DD] ASSETS [cash] = LIABILITIES[DD] [The cash is property of the bank] [liable, DDs are owed to depositors] Cash $100,000 DD $100,000 The Goldsmiths F ractional R eserve B anking S ystem Money Creation & Reserves [The current 10% RR is kept in a banks vault or in a Fed vault.] Bank Panics and Regulation

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

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

11 Cat with human teeth Prom date w. Linda Blair Shark to keep in bathtub Teach S tuart Little how to brush his teeth to brush his teeth MS = Currenc y+ DD of Public $1,000 DD by Emily [ MS = Currenc y+ DD of Public ] $1, Em s DD + PMC = TMS $ $ $ $ $80.00 $1, $3, = $4, $ 3, PMC = ER[$750] x M[4] PMC = Frog with teeth New Deposits [New Reserves] DD New Required ReservesRR=25% DD Created By New Loans [equal to new ER] Bank A B C D E MS grows by multiple of 4

12 Joe Biker 1. Joe Biker deposits $10, 000 in his bank. Suzie Rah Rah 2. Suzie Rah Rah borrows $8, 000 RR = 20% Suzie 3. Suzie pays $ 8, 000 for a new car. GoNow Auto deposits the $ in 2 nd Bank nd Bank lends Sports Shop $ 6, 400. $ 50, Eventually the MS will be $ 50, 000 Joe $ 10, 000 +$ 40, 000 =$ 50, 000 MS $ 10, 000 $ 8, 000 $ 18,000 MS $ 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 MS is $ 10, 000

13 Most Famous Panic Run in Movie History

14 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]

15 History of Deposit Insurance In 1934, federal deposit insurance made its debut at $2,500 $2,500 to protect the average familys savings and end the bank runs bank runs that had shut down businesses and contributed to the Great Depression Great Depression. Through the years the coverage rose $5,000 increments in $5,000 increments until the 70s until the 70s when it jumped to $40, In 1980, it was raised $100,000 to $100,000.

16 Wow, you mean we can create money out of thin air.? gold-smithy Once upon a time there was a gold-smithy who offered to store peoples paper receiptsfor the gold gold in his vault. He issued paper receipts for the gold, and it was not long used the paper to purchase eggs and beer before the townsfolk used the paper to purchase eggs and beer. The smithys paper receiptsfirst checksgood as gold. paper receipts [first checks] became as good as gold. not stupidI have 2000 ounces of 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 more than 100 ounces in a single day. What harm could it do if I lent out say, half the gold half the gold I now have? Ill still have more than enough to pay off any depositors that come in for a withdrawal. No one will know the difference. I earn 30 additional ounces of goldI think Ill do it. could earn 30 additional ounces of gold each week. I think Ill do it. The smithy has invented the Fractional Reserve Banking System. Advantages of Lending disadvantagebank runs Advantages of Lending [One disadvantage was the possibility of bank runs] Depositors havent lost 1. Depositors havent lost money [ Goldsmiths paid them instead of other way ] interestgive some to depositors 2. With the interest you earned you could give some to depositors. loans benefited the community 3. The loans benefited the community thru loans The Very Early Days Of Banking The fractional banking system began when someone issued claims for gold that already belonged to someone else. Greatestinventionsince sliced bread There were more claims to gold than there were ounces of gold.

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

18 $250,000 Cash $250,000 $250,000 Capital Stock $250,000 ASSETS LIABILITIES & NET WORTH Deposit Deposit Added to Vault Cash [owe] [own] FORMATION OF A COMMERCIAL BANK In Lovelady, Texas

19 $250,000 Cash $250,000 $250,000 Capital Stock $250,000 ASSETS LIABILITIES & NET WORTH TRANSACTION 2 Acquiring Property and Equipment 240,000 $240,000 Cash [own] [owe] FORMATION OF A COMMERCIAL BANK In Lovelady, Texas

20 $ 10,000 Cash $ 10, ,000 Property 240,000 $250,000 Capital Stock $250,000 Birth OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES & NET WORTH Lovelady Bank [own] [owe]

21 $ 10,000 Cash $ 10, ,000 Property 240,000 $250,000 Capital Stock $250,000 ASSETS LIABILITIES and NET WORTH TRANSACTION 3 Accepting Deposits $100,000 $100,000 Cash $250,000 $250,000 FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank

22 $110,000 Cash $110,000 $240,000 Property $240,000 $100,000 DD $100, ,000 Capital Stock 250,000 ASSETS LIABILITIES and NET WORTH $10,000] [Was $10,000] FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank

23 $350,000 $110,000 Cash $110, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 ASSETS LIABILITIES and NET WORTH $10,000] [Was $10,000] $350,000 FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank

24 $110,000 Cash $110, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 FORMATION OF A COMMERCIAL BANK In Lovelady, Texas ASSETS LIABILITIES & NET WORTH TRANSACTION 4 $50,000 A $50,000 check is written against the bank $350,000 $350,000 Lovelady Bank

25 $ 60,000 Cash $ 60, ,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 ASSETS [was $110,000 ] $300,000$300,000 LIABILITIES & NET WORTH FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank

26 NOTES: Banks create money by lending ER and destroy money by loan repayment. Purchasing bonds from the public also creates money. FORMATION OF A COMMERCIAL BANK In Lovelady, Texas

27 $ 60,000 Cash $ 60, ,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 ASSETS TRANSACTION 5 Make a loan from excess reserves $50,000 of $50,000 LIABILITY and NET WORTH FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank

28 $ 60,000 Cash $ 60,000 50,000 Loans 50, ,000 Property 240,000 $100,000 DD $100, ,000 Capital Stock 250,000 ASSETS LIABILITIES and NET WORTH FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank Making the loan created money!

29 $ 60,000 Cash $ 60,000 0 Loans 0 240,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 ASSETS LIABILITIES AND NET WORTH $50,000 After a check for the $50,000 is written against the bank FORMATION OF A COMMERCIAL BANK In Lovelady, Texas Lovelady Bank

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

31 And What Happens If A Turtle Doesnt Keep Up with His Mortgage Payments

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

33 $ 10,000 Reserves $ 10,000 50,000 Loans 50, ,000 Property 240,000 $ 50,000 DD $ 50, ,000 Capital Stock 250,000 ASSETS LIABILITIES and NET WORTH TRANSACTION 6 Repaying a loan with cash$50,000 Lovelady Bank FORMATION OF A COMMERCIAL BANK In Lovelady, Texas

34 $ 10,000 Reserves $ 10,000 0 Loans 0 240,000 Property 240,000 $0 DD $ 0 250,000 Capital Stock 250,000 ASSETSLIABILITIES and NET WORTH Lovelady Bank FORMATION OF A COMMERCIAL BANK In Lovelady, Texas $50,000 $50,000 in money supply is destroyed!

35 MULTIPLE DEPOSIT EXPANSION PROCESS RR= 20% Bank Acquired reserves and deposits RequiredreservesExcessreserves Amount bank can lend - New money created ABCDEFGHIJKLMN Other banks $ $ $ $ $ PM C P M C in the banking system [ MxER] TMS = $ st 10 $ 357 ofthe$400

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

37 $1,000 New reserves $ 1,000 Initial Deposit $ 3,000 PMC PMC thru bank lending $ 250 RR $750 Excess reserves Ashley Olsen Deposits $1,000 in her bank TMS = $4,000 Ashley Olsen $ 1,000 deposits $ 1,000 RR = 25 % Ashley Olsens

38 New reserves $1,000 Excess Reserves $4,000 PMC PMC thru Bank Lending Fed Buys A $1,000 Bond From Ashleys Bank TMS is $ % RR Ashley Olsens

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

40 NS [ MS = Currrency + DD of Public ] deposits $1,000RR of 10%. 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 banks loans would PMCM X ERPotential TMS be $______. PMC[M X ER] in the banking system is $_____. Potential TMS could become as high as $_______. DD of $100,000RR is 10% 37. Suppose a commercial bank has DD of $100,000 and the RR is 10%. RR & ER are equalTR If the banks RR & ER are equal, then its TR are ($10,000/$20,000/$30,000). ER 38. Total Reserves (minus/plus) RR = ER. DD of $500,000RR is 10% 39. Suppose the Thunderduck Bank has DD of $500,000 & the RR is 10%. ER of $4,000TR If the institution has ER of $4,000 then its TR are ($46,000/$54,000/$4,000). ERare $4,000DD are $40,000RR is 10% 40. If ER in a bank are $4,000, DD are $40,000, & the RR is 10%, then TR TR are ($4,000/$8,000). main purpose of the RR 41. The main purpose of the RR is to (have funds for emergency withdrawals/ influence the lending ability of commercial banks). check for $1 42. If I write you a check for $1 & we both have our checking accts at the Poorman Bank, the banks balance sheet will ( increase/decrease/be unchanged). make loansrepaying bank 43. Banks (create/destroy) money when they make loans and repaying bank loans loans (create/destroy) money. bank loan is repaidMS 44. When a bank loan is repaid the MS is (increased/decreased). Fed Funds rate 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; M X ER =PMC ; PMC( Public )+DD=TMS; PMC(Fed)=TMS 9009,000 10,000

41 loans as cash 47. If borrowers take a portion of their loans as cash, the maximum amount by MS which the banking system increases the MS by lending will (increase/decrease). NS [ MS = Currrency + DD of Public ] Leakages (limitations) of the Money Creating Process Leakages (limitations) of the Money Creating Process 1. Cash leakages [taking part of loan in cash] 1. Cash leakages [taking part of loan in cash] 2. ER (banks dont loan it or we dont borrow] 2. ER (banks dont loan it or we dont borrow] RR+ER=TR; TR-RR=ER; TR-ER=RR; M X ER =PMC ; PMC( Public )+DD=TMS; PMC(Fed)=TMS RR was lowered 46. If the RR was lowered [say, from 50% to 10%], the size of the monetary multiplier M M monetary multiplier [ M M] would (increase/decrease).

42 Money Supply = DD + Currency of the Public PMC PMCTMS ER Loans C rea. I n Potential $100[ 10 % RR] $100[ 10 % RR] [1 st Bank] [1 st Bank] System Total MS Banks / Public DD [$100] $90 $90 $900 $1,000 Fed / Public / B anks DD [$100] $90 $90 $900 $1,000 [* Fed buys bonds from public who put the money in their DD ] [* Fed buys bonds from public who put the money in their DD ] B anks / Fed Fed L oan [$ 100 ] $100 $100 $1,000 $1,000 [or sells bonds to Fed ] [or sells bonds to Fed ] PMC PMC TMS PMC PMC TMS ER Loans C rea. In Potential ER Loans C rea. In Potential $100 [ 20 % RR] [1 st Bank] [1 st Bank] System Total MS Banks / Public DD [$100] $80 $80 $400 $500 Fed / Public / B anks DD [$100] $80 $80 $400 $500 [* Fed buys bonds from public who put the money in their DD ] [* Fed buys bonds from public who put the money in their DD ] Banks / Fed Fed L oan [$100] $100 $100 $500 $500 [or sells bonds to Fed ] [or sells bonds to Fed ]

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

44 New reserves $1,000 Excess Reserves $ 5,000 PMC thru Bank System Lending Fed buys a $ 1,000 Bond from Sanjayas Bank TMS is $ % RR Fed Sanjayas

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

46 Excess Reserves Total(Actual ) Reserves PMC = M x ER, so 5 x $1 = $5 TMS [$5] = PMC [$5] [ MS = currency + DD of Public ] Evas Bank Borrows $1 From The Fed [20% RR] 0 One Dollar RR Eva Longorias Fed

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48 $5, , , Prom Dance lessons with N. Dynamite MS = Currency + DD of Public $1,000 DD by Katy [ MS = Currency + DD of Public ] MS MS grows by 2 multiple of 2 1, , , , Katy s DD + PMC = TMS $ 2, $1, $ $ $5, $5, = $10, $5, PMC = ER[$2,500 x M[2] PMC = New Deposits [New Reserves] DD New Required ReservesRR=50% DD Created By New Loans [equal to new ER] Bank A B C D Duck that can dance Dance Lessons w. Laura Bush Hunting with Dick Cheney 2,500.00

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

50 [RR + ER = TR; TR - RR = ER; TR - ER = RR; MxER = PMC; PMC( Public )+1 st DD =TMS; PMC( Fed )=TMS] MS = Currency + DD of Public 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 $______. P otential M oney C reation in the system is $_______. P otential TMS is $_______. 10. RR is 50 % ; a bank borrows $20,000 from the Fed ; this one banks ER are increased by $ _____. P otential M oney C reation in the system is $______. P otential TMS is $______ by $ _____. P otential M oney C reation in the system is $______. P otential TMS is $______ 11. RR is 20%; the Duck Bank sells $10 M of bonds to the Fed ; Duck Banks ER are increased by $___million. P MC in the system is $__________. TMS is $__________. increased by $___million. P MC 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 increased by $___________. Potential Money Creation in the banking system is $______________. Potential TMS is $___________. $______________. Potential TMS is $___________ % RR; Fed buys $400 million of bonds from the Friar Bank. This one banks ER are increased by $_____million. banks 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 (increased/decreased) by $_______. Potential Money Creation in the banking system is (increased/decreased) by $________. banking system is (increased/decreased) by $________. 15. RR is 10%; a bank borrows $10 million from the Fed ; this one banks ER are increased by $_______ million. PMC in the banking system is ER are increased by $_______ million. PMC in the banking system is $_______million. Potential TMS is $_______million. $_______million. Potential TMS is $_______million. Banks and the Fed 25, , ,000 20,000 40,000 40, million 50, , , M 400 M

51 RR+ER = TR; TR-RR=ER; TR-ER=RR; M x ER = PMC; PMC( Public )+1 st 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 $___million. ER increase by $___million. Potential Money Creation in the banking system is $_____M. Potential TMS is $____million. banking system is $_____M. Potential TMS is $____million. 2. T here 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 $_______. This one bank can increase its loans by a maximum of $_______. Potential Money Creation in the banking system is $_______. $_______. Potential Money Creation in the banking system is $_______. Potential Total Money Supply could be $__________. 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 $__________. 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. N o 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 $________. increase its loans by $_______. PMC in the system is $________. TMS is $________ ,000 12,000 48,000 64,000 30,000 $2,000 $50,000 25,000 40,000 30, ,000 75, , ,000 Banks and the Public Banks and the Public MS = currency + DD of Public

52 [RR + ER =T R; TR-RR = ER; TR - ER = RR; MxER = PMC; PMC( Public )+1 st DD = TMS; PMC( Fed ) = TMS] MS = Currency + DD of the Public MS = Currency + DD of the Public Fed Public DD [When Fed buys securities from Public, they will put the money in their DD ] Fed Public MS 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 _______. P otential TMS is _______. Fed Public MS 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 ________. Fed PublicMS 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 __________. Fed Public MS 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 _________. Fed Public MS 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 $200 M $400 M $5 M $4 M $20 M $25 M $50 M $45 M $450 M $500 M Fed and the Public Fed and the Public

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

54 RR is 10%.Emilia deposits the $100 bill increase in the total money supply 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 didnt 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.

55 [ MS = Curr. + DD of 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. 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 Hale Bank can increase its loans by a maximum of __________. PMC in the banking system is __________. Potential TMS is ______________. 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 ____________. PMC in the banking system is __________. Potential TMS is ____________. 4. RR is 40%; Buzon B ank borrows $1 million from the Fed. This bank can increase its loans by a maximum of _______ __. PMC is __________. TMS is __________. 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 This bank can increase its loans by a maximum of __________. Possible Money Creation in the banking system is ___________. Potential TMs is _____________. 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 ___________. 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 __________. 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 banks ER are increased by _________. PMC is __________. Potential TMS is ___________. are increased by _________. PMC is __________. Potential TMS is ___________. RR is 10%; Tran Bank borrows $5 from the Fed ; the Tran Banks ER 10. RR is 10%; Tran Bank borrows $5 from the Fed ; the Tran Banks ER are increased by _______. PMC is __________. Potential TMS is __________. are increased by _______. PMC is __________. Potential TMS is __________.$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 $70,000 $70,000 $10 M $25 M $5.00 $50.00$50.00 Commercial Banks Fed Public

56 [ MS = Curr ency + DD of Public ] [ MS = Curr ency + DD of Public ] [RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC( Public )+1 st 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 _______. bank can increase its loans by a maximum of ______. PMC is ______. TMS is _______. 2. RR is 50%; the S tansbury Plaza Bank borrows $100,000 from the Fed. This one bank can increase its loans by a maximum of ________. PMC is _______. TMS is ________. increase its loans by a maximum of ________. PMC is _______. TMS is ________. 3. RR is 25%; Fed buys $100,000 of securities from the publi c [ Mary Gangel ]. Potential Money Creation in the system is ________. Potential TMS is _________. Potential Money Creation in the system is ________. Potential TMS is _________. 4. T he Curtis Bank has DD of $200,000; RR is 10%; RR & ER are equal. TR are _______. 5. T he 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 __________. 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 __________. 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 banks ER are increased by _______. PMC in the system is __________. TMS is __________. are increased by _______. PMC in the system is __________. TMS is __________. 8. The Masters B ank 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 ____________. 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 _____________. PMC in the banking system is ____________. Potential TMS is _____________. $100,000 $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 $2 million $40,000 $400 mil. $400 million $10.00 $12.50 Banks Fed Public Banks Fed Public $300,000 $400,000 $75,000

57 [ MS = Curr. + DD of Public ] [ MS = Curr. + DD of Public ] [RR+ER = TR; TR-RR = ER; TR-ER=RR; MxER = PMC;PMC( Public )+1 st DD = TMS; PMC( Fed )=TMS] [RR+ER = TR; TR-RR = ER; TR-ER=RR; MxER = PMC;PMC( Public )+1 st 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 _______. 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 ____________. 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 ____________. 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 ____________. 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? ____________ 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]. Potential Money Creation in the banking system is ____________. Potential Money Creation in the banking system is ____________. 7. RR is 20%; the Rodriquez-Loser Bank borrows $1 million from the Fed. This single banks ER are increased by ____________. This single banks 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 _______________. Potential Total Money Supply[TMS] could be as much as _______________. 9. The RR is 25% & the Fed $10 million of bonds from the Hicks Bank. 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 ____________. 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. P otential Money Creation in the system is _________. deposits [ DD ] $50.00 there. P otential Money Creation in the system is _________..95 $1 million $100,000 $500,000 $100,000 $1 million $800 million $30 million $50.00 $80,000 Commercial Banks Fed Public

58 Fed 1. If the RR is 40% and the Fed buys $100 M of bonds from public [Sarah], MS the public [Sarah], then the MS is increased by _______. ER are increased by ______. PMC is _______. TMS would be ______. Bolding Bank 2. RR is 50% and the Bolding Bank borrows $100 M from the Fed Fed. As a result, RR are increased by ______. ER is increased by _______. PMC and TMS is increased by ________. CollinsBank DD 3. Collins Bank has DD of $400,000 and the RR is 25%. If RR and ER are equal, then TR are _______. Tran Bank DD $200, The Tran Bank has ER of $60,000 & DD is $200,000. If the RR is 20%, TR are _________. Fed 5. RR is 20% & the Fed buys $50 million of bonds from the public [Geof B.]. MS 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 0 Banks Public Fed RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC[ Public ]+1 st DD =TMS; PMC[ Fed ]= TMS

59 Money Creation Problems from the 2005 Macro MC Exam Money Creation Problems from the 2005 Macro MC Exam (87%) fractional reserve banking system (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%) (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. $100,000 b. $90,333 c. $10,000 d. $9,000 e. $1,000 AssetsLiabilities Assets Liabilities Total Reserves: $15,000 DD: $100,000 Securities: $70,000 Loan: $15,000 (37%) RR is 12% (37%) 42. A commercial bank is facing the conditions given above. If the RR is 12% maximum amount of and the bank does not sell any of its securities, the maximum amount of additional lending additional lending this bank can undertake is a. $15,000 b. $12,000 c. $3,000 d. $1,800 e. 0 (53%)RR is 20%keep some excess reserves (53%) 43. Assume the RR is 20%, but banks voluntarily keep some excess reserves. $1 million increase in new reserves A $1 million increase in new reserves will result in a.an increase in the MS of $5 millionc. decrease in MS of $1 million b.an increase in the MS of less than $5 milliond. 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. 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.

60 The End


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