1. Creating Money © 2012 McGraw-Hill Ryerson Limited8- 1 LO4 Assets What a company owns or what is owed to it Liabilities What a company owes Net Worth Total assets minus total liabilities Also called equity

2. Balance Sheet of Saymor Bank Ltd. as of December 31, 2011 AssetsLiabilities and Equity Reserves$ 10 000 Demand deposits$100 000 Loans to customers60 000 Shareholders’ equity20 000 Securities30 000 Fixed assets 20 000 $120 000 Creating Money © 2012 McGraw-Hill Ryerson Limited8- 2 LO4 Net worth of Saymor Bank is $20,000 (million):

3. Creating Money © 2012 McGraw-Hill Ryerson Limited8- 3 LO4 Target Reserve Ratio the portion of deposits that a bank wants to hold in cash Target reserves = target reserve ratio  demand deposits

4. Creating Money © 2012 McGraw-Hill Ryerson Limited8- 4 LO4 Reserve ratio = 10,000/100,000 = 10% Balance Sheet of Saymor Bank Ltd. as of December 31, 2011 AssetsLiabilities and Equity Reserves$ 10 000 Demand deposits$100 000 Loans to customers60 000 Shareholders’ equity20 000 Securities30 000 Fixed assets 20 000 $120 000

5. Creating Money © 2012 McGraw-Hill Ryerson Limited8- 5 LO4 Excess Reserves reserves in excess of what the bank wants to hold as its target reserves Excess reserves = Actual reserves  target reserves

6. Balance Sheet of Saymor Bank Ltd. as of December 31, 2011 AssetsLiabilities and Equity Reserves$ 10 000 Demand deposits$100 000 Loans to customers60 000 Shareholders’ equity20 000 Securities30 000 Fixed assets 20 000 $120 000 Creating Money © 2012 McGraw-Hill Ryerson Limited8- 6 LO4 New deposit of $1,000: Target reserves = 10% x 101,000 = $10,100 Excess reserves = 11,000 – 10,100 = $900 11 000 101 000

7. Creating Money © 2012 McGraw-Hill Ryerson Limited8- 7 LO4 Banks use excess reserves to make loans Loans are eventually deposited, creating new money Process continues until no more excess reserves

8. Money Multiplier © 2012 McGraw-Hill Ryerson Limited8- 8 LO4 the increase in total deposits that would occur in the whole banking system as a result of a new deposit in a single bank Money Multiplier = 1 / Target Reserve Ratio

9. Self-Test 7 © 2012 McGraw-Hill Ryerson Limited LO4 8-9 Assume that the nation’s banking system is over-reserved by $20 M. What is the value of the money multiplier and what is the maximum possible expansion in the money supply if the target reserve ratio is: a)10% b)2% c)5%

10. Money Multiplier © 2012 McGraw-Hill Ryerson Limited8- 10 LO4 Also works in reverse if under-reserved Banks can call in loans, decreasing deposits The size of the multiplier can be reduced by: 1.An increase in the banks’ target reserves 2.An increase in the amount of cash people hold 3.An insufficient number of creditworthy loan applicants 4.A reduced demand for loans during a recession