Chapter 14: How Banks and Thrifts Make Money
Assets = Liabilities + Net Worth
Assets are what you own
Liabilities are what you owe
Net Worth is the value of property for what you may have
Bank deposits are subject to a reserve requirement
Reserve Ratio = Commercial Bank's Required Revenue/Commercial Bank's Checkable-deposit liabilities
- Excess Reserves = Actual Reserves - Requires Resources
- Lending Ability
- Asset or liability to which bank
Banks create money by lending excess reserves and destroy it by loan repayment
Purchasing bonds from the public also create money
Monetary Multiplier = 1 / Required Reserve Ratio
Maximum Checkable Deposit Creation = Excess Reserve * Monetary Multiplier
Chapter 13: Understanding the Concept of Money
- Uses of Money
- Medium of Exchange
- Used to barter or trade
- Unit of account
- Gives money economic worth
- Store of value
- Types of Money
- Representative Money: paper money that is backed by a tangible product
- Ex. Certificate
- Commodity Money
- Gold and Silver Coins
- Gets its value from the material which it is made
- Fiat Money
- It is money because the government says so
- Characteristics of Money
- Durability
- How long is the money good for?
- Coins (long time)
- Paper money (short time)
- Portability
- You can carry money anywhere
- Divisibility
- Money can be broken down into smaller units
- Uniformity
- All money is identical unless taken out of circulation and made anew
- Scarcity
- Acceptability
- Money is accepted anywhere you go
M1 and M2 Money
M1 money consists of currency and circulation
- Paper dollars and coins
- Traveler's check
- Checkable deposit
- Demand Deposit
- Checking Account
- Account for the 75% of money in circulation
M2 Money
- Savings Account
- Money Market Account
- Accounts held by banks outside of the US
- Account for the other 25% of money in circulation
M1 money is more liquid (able to spend it)
Multiple Deposit Expansion
Reserve Requirement: The fed requires banks to always have some money readily available to meet consumers demand for cash.
- The amount set by the Fed, is the required Reserve Ration
- The required reserve ration is the percent of demand deposits (checking account balances) that must not be loaned out.
- Typically the required reserve ration is 10 percent
The Money Multiplier
Similar tot he spending multiplier, the money multiplier shows us he impact of a change in demand deposits on loans and eventually the money supply.
To calculate the money multiplier, divide 1 by the required reserve ratio
- Money Multiplier = 1/Reserve Ratio
- Ex. If the reserve ratio is 25%, then the multiplier = 4
- Why? 1/.25 = 4
The 3 types of multiple deposit expansion questions
- Type 1: Calculate the initial change in excess reserves
- aka. The amount a single bank can loan from the initial deposit
- Type 2: Calculate the change in loans in the banking system
- Type 3: Calculate the change in the money supply
Sometimes Type 2 and Type 3 will have the same result (ie. no Fed involvement)
The amount of new demand deposits - requires reserves = the initial change in excess reserves
The maximum change in loans + $amount of Federal reserve action = change in money supply
You have all the notes and it is very well organized. I like the pictures, the only thing I might suggest is put videos for others that need more to understand the topics.
ReplyDeleteI like that some of your bullets are clear, concise, and to-the-point. I also thought the pictures you added were helpful because most of the time, walls of text make information seem abstract, so good one there. Nice organization, good job!
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