G. Money and Banking and How Banks Create Money 1. The process of monetary creation...an application 2. The application of the monetary multiplier H. The Federal Reserve Banks and Monetary Policy 1. Effect which open market operations have on money supply requirements have on money supply 3. Effect which changes in the discount rate have on money supply 4. Effect which changes in the money supply have on aggregate demand and equilibrium GDP 5. Strengths, shortcomings, and problems with monetary policy 2. Effect which changes in reserve

BOARD OF GOVERNORS OPEN MARKET COMMITTEE FEDERAL ADVISORY BOARD TWELVE FEDERAL RESERVE BANKS COMMERCIAL BANKS THRIFTS PUBLIC: HOUSEHOLDS AND BUSINESS $ $ $$ 1/3 NATIONAL2/3 STATE

$100,000 BANK A BANK B BANK C Entire Money Supply

BANK A ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 MONEY SUPPLY!!!!!!! $100,000 Money in the bank’s vault is NOT part of money supply!!!

BANK A ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 LEGAL RESERVES--Those assets which banks can use to meet their reserve requirements. They consist of vault cash and the bank's deposits at the Federal Reserve.

BANK A ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 LEGAL RESERVES--Those assets which banks can use to meet their reserve requirements. They consist of vault cash and the bank's deposits at the Federal Reserve.

BANK A ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times

$100,000 BANK A $100,000 ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times RESERVE RATIO--That percentage of a bank's checking deposit liabilities which must be maintained as legal reserves. This ratio is set by the FED.

$100,000 BANK A $100,000 ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times RESERVE RATIO--That percentage of a bank's checking deposit liabilities which must be maintained as legal reserves. This ratio is set by the FED. ASSUME RESERVE RATIO IS 20%

ASSETS VAULT CASH 100,000 LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times 20%

ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times REQUIRED 20,000 ? 80,000

ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times 20% REQUIRED 20,000 ? 80,000 NOTE: IT’S 20% TIMES THE CHECKING DEPOSIT BALANCE.. NOT 20% TIMES “VAULT CASH”

$100,000 BANK A $100,000 ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times 20% REQUIRED 20,000 ? 80,000 EXCESS RESERVES--The difference between a bank's actual legal reserves and its required reserves.

$100,000 BANK A $100,000 ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times 20% REQUIRED 20,000 ? 80,000 A bank can loan out its excess reserves!!!!!!!!!!!!

$100,000 BANK A $100,000 ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 REQUIRED RESERVES--That portion of a bank's reserves which must be maintained. Required reserves are equal the commercial bank's checking deposit liabilities. to the reserve ratio multiplied times 20% REQUIRED 20,000 A bank can loan out its excess reserves!!!!!!!!!!!! EXCESS 80,000

BANK A ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 80, ,000 20,000 Loan Officers Hopeful borrower NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 MONEY SUPPLY

MONEY SUPPLY NOW IS 180,000 THE ORIGINAL 100,000 PLUS NEW 80,000

BANK A ASSETS VAULT CASH LIABILITIES CHECKING DEPOSITS 100,000 80, ,000 20,000 Loan Officers Hopeful borrower NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 NOTES RECEIVABLE 80,000 MONEY SUPPLY BANK A CAN’T MAKE ANY MORE LOANS…IT’S “LOANED UP”

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B 80,000 VAULT CASH 80,000 CHECKING DEPOSITS 80,000 MONEY SUPPLY

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B VAULT CASH 80,000 CHECKING DEPOSITS 80,000 REQUIRED 16,000 EXCESS 64,000

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B VAULT CASH CHECKING DEPOSITS 80,000 Hopeful Borrower 64,000 80,000 16,000 Notes receivable 64,000 MONEY SUPPLY

MONEY SUPPLY IS NOW 244, ,000 PLUS 80,000 PLUS 64,000

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B VAULT CASH CHECKING DEPOSITS 80,000 Hopeful Borrower 64,000 80,000 16,000 Notes receivable 64,000 MONEY SUPPLY BANK B CAN’T MAKE ANY MORE LOANS…IT’S “LOANED UP”

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B VAULT CASH 80,000 CHECKING DEPOSITS 80,00016,000 N.R. 64,000 BANK C ASSETS LIABILITIES 64,000 VAULT CASH 64,000 CHECKING DEPOSITS 64,000

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B VAULT CASH 80,000 CHECKING DEPOSITS 80,00016,000 N.R. 64,000 BANK C ASSETS LIABILITIES VAULT CASH 64,000 CHECKING DEPOSITS 64,000 Money Supply

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 CASH 20,000 ASSETS LIABILITIES BANK B VAULT CASH 80,000 CHECKING DEPOSITS 80,00016,000 N.R. 64,000 BANK C ASSETS LIABILITIES VAULT CASH 64,000 CHECKING DEPOSITS 64,000 REQUIRED 12,800 EXCESS 51,200

TIME PASSES

BANK A ASSETS LIABILITIES CHECKING DEPOSITS 100,000 N.R. 80,000 VAULT CASH 20,000 80, ,000 0 (Notes Receivable)

WHAT HAS HAPPENED TO MONEY SUPPLY?

WHAT HAS HAPPENED TO MONEY SUPPLY? COIN AND CURRENCY CHECKABLE DEPOSITS PLUS MONEY SUPPLY

WHAT HAS HAPPENED TO MONEY SUPPLY? COIN AND CURRENCY CHECKABLE DEPOSITS PLUS MONEY SUPPLY DOWN NO CHANGE DOWN $80,000