Economics: Unit 4-How Banks and Thrifts Create Money

How Banks and Thrifts Create Money

1. In this chapter, a commercial bank may also be called a thrift institution and a deposit at a bank may also be called a checkable deposit.
2. The balance sheet of a commercial bank is a statement of the bank's assets, the claims of the owners of the bank called net-worth, and claims of the non owners called liabilities. this relationship would be written in equation form as: Assets = liabilities + Net Worth
3. The banking system used today is a fractional reserve system, which means that less than 100% of the money deposited in a bank is kept on reserve.
4. There are two significant characteristics of the banking system as of today.
• Banks can crease money depending on the amount of reserves they hold
• Banks are susceptible to panics or "runs", and to prevent this situation from happening, banks are subject to government regulation.
5. The coins and paper money that a bank has in its possession are vault cash or till money
6. When a person deposits cash in a commercial bank and received a checkable deposit in return, the size of the money supply has not changed
7. The legal reserve of a commercial bank  (ignoring vault cash) must be kept on deposit at the Federal Reserve Bank
8. The reserve ration is equal to the commercials bank's required reserves divided by its checkable deposit liabilities
9. The authority to establish and vary the reserve ration within limits legislated by Congress is given tot he fractional reserves.
10. If commercial banks are allowed to accept (or create) deposits in excess of their reserves, the banking system is operating under a system of fractional reserves
11. The excess reserves of a commercial bank equal its actual reserves minus its required reserves
12. The basic purpose for having member banks deposit a legal reserve int he federal Reserve Bank in their district is to provide control of the banking system by the Fed
13. When a commercial bank deposits a legal reserve in its district Federal Reserve and, the reserve is an asset to the commercial bank and liability to the Federal Reserve Bank
14. When a check is Drawn on Bank X, deposited in Bank Y, and cleared, the reserves of Bank X are decreased and the reserves of Bank Y are increased; deposits in Bank Y are increased.
15. A single commercial bank in a multibank system can safely make loans or buy government securities equal in amount to the excess reserves of that commercial bank
16. When a commercial bank n\makes a new loan of $10000, the supply of money increases by $10000, but when a loan is repaid , the supply of money decreases by $10000
17. When a commercial bank sells $10000 government bond to a securities dealer, the supply of money decreases by $10000, but when a commercial bank buys a $10000 government bond from a securities dealer, the supply of money increases by $10000
18. (21.) The grater the reserve ration, the smaller the money multiplier
19. (22.) The banking system can make loans and create money in an amount equal to its excess reserves multiplied by the monetary multiplier
20. (23.) Assume that the required reserve ration is 16.67% and the banking system is $6 million short of required reserves. If the banking system is unable to increase its reserves, the banking system must decrease the money supply by $36 million.
21. (24.) The money-creating potential of the commercial banking system is lessened by the withdrawal of currency from banks and by banks not lending excess reserves.