1. Reserve Banking and T-Accounts
Open Market Operations
define
$10,000
$10,000
Must balance

2. Reserve Banking and T-Accounts
Reserves $10,000
Deposits $10,000
* Each deposit reduces currency and increases Demand Deposits by same amount
*If there is 100% Reserve Banking – then the banking system has no effect on the money supply… - Explain

3. * Assume the flow of deposits = flow of withdraws
R R $2000
Deposits $10,000
Loans $8000 or
Excess Reserves -----
* Assume the flow of deposits = flow of withdraws

4. *careful * What did the Fed do?
Bought a bond from you = $10,000
Set the RR which allowed the bank to loan out $8000
…..so the Fed created $18,000
What is the Money Supply now?
$18,000
*Created more money and liquidity but not wealth

5. …or “the money supply is currently $18,000, but it could become…..?
1 / R = 1 / 1/5 or 1/ = 5
*careful- b/c even if RR is 20%...banks could choose to hold more in Excess Reserves which would change the MM…..see #2 g
…or “the money supply is currently $18,000, but it could become…..?
Money Multiplier x Deposits (or Total Assets)
5 x $10,000 = $50,000

6. Less……
Smaller amount of each loan gets re-deposited to be loaned out again
* The larger the reserve requirement = the smaller the money multiplier …..Explain

7. Less……
Smaller amount of each deposit gets loaned out to be deposited again

8. $1000 in currency
Assets Liabilities
R $0 Deposits $0

9. $1000
Assets Liabilities
RR $ Deposits $1000

10. Assets Liabilities
RR $ Deposits $1000
L $800
MM x Deposits
5 x $1000 = $5000

11. Assets Liabilities
RR $ Deposits $1000
L $800
Original $1000 already existed…..the Fed created the RR which created the MM of 5….so MS could become $5000…….so Fed is responsible for $4000
**compare to #1 d

12. Assets Liabilities
RR $ Deposits $1000
L $900
MM = so MS could become …$10,000

13. In c - the RR was 20% so MM = 5 …so MS = $5000
In e – the RR was 10% so MM = 10 …so MS = $10,000
Larger the RR = smaller MM = less growth potential in MS

14. Assets Liabilities RR $100 Deposits $1000 ER $100 L $800
Even if RR is 10% but banks choose to hold more ….here they are acting as if RR were 20%.....so MM is really 5 instead of 10….so MS could only grow to $5,000

15. In c – RR = 20% so MM = 5 so MS becomes $5000
In g – RR = 10% , but bank holds extra 10% - so acting like RR 20% …so MM = 5 so MS becomes $5000
*Consider what the Fed can and can not control (text p. 621)