1、1,Chapter 25 Money Creation,Key ConceptsSummaryPractice QuizInternet Exercises,2002 South-Western College Publishing,2,In the Middle Ages, what was used for money?,Gold was the money of choice in most European nations,3,Who were the founders of our modern-day banking?,Goldsmiths, people who would ke
2、ep other peoples gold safe for a service charge,4,What was the first currency?,People would use the receipts they received from goldsmiths as paper money,5,How did the early goldsmiths act as the first banks?,Some goldsmiths made loans and received interest for more gold than the actual gold held in
3、 their vaults,6,What is fractional reserve banking?,A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed,7,What are required reserves?,The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed,8,What
4、 is a required reserve ratio?,The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed,9,What are excess reserves?,Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves,10,Typical Bank - Balance Sheet 1,As
5、sets,Liabilities,Required Reserves,$5 million,Checkable Deposits,$50 million,Excess Reserves,0,Loans,$45 million,Total,$50 million,Total,$50 million,Note: The Fed requires the bank to keep 10% of its checkable deposits in reserve.,11,What are total reserves?,Total Reserves = required reserves + exce
6、ss reserves,12,Required Reserve Ratio of the Fed,Type of Deposit,Required Reserve Ratio,Checkable deposits,3%,0 - $46.5 million,Over $46.5 million,10%,13,Best National Bank - Balance Sheet 2,Assets,Liabilities,Required Reserves,$10,000,Brad Rich Account,$100,000,Excess Reserves,+$90,000,Total,$100,0
7、00,$100,000,Note: The Fed requires the bank to keep 10% of its checkable deposits in reserve.,Total, in M1,0,14,Best National Bank - Balance Sheet 3,Assets,Liabilities,Required Reserves,$19,000,Brad Rich Account,$100,000,Excess Reserves,$81,000,Loans,+$90,000,Note: The Fed requires the bank to keep
8、10% of its checkable deposits in reserve.,Total, in M1,$90,000,Connie Jones Account,+$90,000,Total,$190,000,$190,000,15,Best National Bank - Balance Sheet 4,Assets,Liabilities,Required Reserves,$10,000,Brad Rich Account,$100,000,Excess Reserves,0,Loans,$90,000,Note: The Fed requires the bank to keep
9、 10% of its checkable deposits in reserve., in M1,0,Connie Jones Account,0,Total,$100,000,$100,000,16,Yazoo Bank - Balance Sheet 5,Assets,Liabilities,Required Reserves,+$9,000,Better Health Span Account,+$90,000,Excess Reserves,+$81,000,Total,$90,000,Total,$90,000,Note: The Fed requires the bank to
10、keep 10% of its checkable deposits in reserve.,17,Expansion of the Money Supply,#,Bank,1,Best Natl Bank,$100,000,2,Bank A,3,Total increase,Increase in Required Reserves,90,000,Total all other banks,59,049,Increase in Deposits,Increase in Excess Reserves,4,5,6,7,Yazoo Natl Bank,Bank B,Bank C,Bank D,B
11、ank E,81,000,65,610,53,144,72,900,$10,000,9,000,5,905,8,100,6,561,5,314,7,290,$90,000,81,000,53,144,72,900,59,049,47,830,65,610,478,297,47,830,430,467,$1,000,000,$100,000,$900,000,18,What is the money multiplier?,The maximum change in the money supply due to an initial change in the excess reserves
12、banks hold,19,What is the money multiplier equal to?,1 / required reserve ratio,20, M1 = ER x m,Actual money supply change,Initial change in excess reserves,Money multiplier,21,Can the multiplier be smaller than indicated?,Yes, because of cash leakages and the chance that banks will not use all of t
13、heir excess reserves to make loans,22,What would the Fed with inflation?,Decrease the money supply,What would the Fed do with unemployment?,Increase the money supply,23,What is monetary policy?,The Feds use of - open market operations in discount rate in required reserve ratio,24,What are open marke
14、t operations?,The buying and selling of government securities by the Federal Reserve System,25,Federal Reserve System - Balance Sheet 6,Assets,Liabilities,Government securities,$472,Fed notes,$492,Loans to banks,1,Total,$548,Total,$548,Other assets,75,Deposits,34,Other liabilities and net worth,22,2
15、6,Federal Reserve Bank - Balance Sheet 7,Assets,Liabilities,Government securities,+$100,000,Reserves of Best Natl bank,+$100,000,Note: The Fed conducted open market operations in order to increase the money supply by purchasing $100,000 in government securities.,Initial in M1,+$100,000,27,Federal Re
16、serve Bank - Balance Sheet 8,Assets,Liabilities,Government securities,-$100,000,Reserves of Best Natl bank,-$100,000,Note: The Fed conducted open market operations in order to decrease the money supply by selling $100,000 in government securities.,Initial in M1,-$100,000,28,Fed,Fed buys government s
17、ecurities and banks gain reserves,Fed sells government securities and banks loose reserves,Banks,Public,$,$,$,$,29,What is the discount rate?,The interest rate the Fed charges on loans of reserves to banks,30,What would the Fed do if we have inflation?,A higher discount rate discourages banks from b
18、orrowing reserves and making loans,31,What would the Fed do if we have unemployment?,A lower discount rate encourages banks to borrow reserves and make more loans,32,What is the federal funds market?,A private market in which banks lend reserves to each other for less than 24 hours,33,What is the fe
19、deral funds rate?,The interest rate banks charge for overnight loans to other banks,34,What would the Fed do if we had inflation?,A higher federal funds rate discourages banks from borrowing reserves and making loans,35,What would the Fed do if we had unemployment?,A lower federal funds rate encoura
20、ges banks to borrow reserves and make more loans,36,What is a required reserve requirement?,The Fed determines how much a financial institution must keep in reserve as a percentage of its total assets,37,What is the required reserve ratio?,That percentage the Fed stipulates that financial institutio
21、ns must keep in reserve to meet its reserve requirement,38,If the reserve ratio is one tenth, what is the multiplier?,1 1/10 = 10,39,If the reserve ratio is one twentieth, what is the multiplier?,1 1/20 = 20,40,What would the fed do if we had inflation?,Increase the reserve ratio,What would the fed
22、do if we had unemployment?,Decrease the reserve ratio,41,Is changing the reserve ratio a popular monetary tool?,No, changing the reserve ratio is considered a heavy-handed approach and is thus infrequently used,42,What are the shortcomings of monetary policy?,Money multiplier inaccuracy Nonbanks Whi
23、ch money definition should the Fed control? Lag effects,43,Key Concepts,44,Key Concepts,Who were the founders of our modern-day banking? What is fractional reserve banking? What are required reserves? What is a required reserve ratio? What are excess reserves? What are total reserves? What is the mo
24、ney multiplier? What is the money multiplier equal to?,45,Key Concepts cont.,What is monetary policy? What are open market operations? What is the discount rate? What is the federal funds rate? What is a required reserve requirement? What is the required reserve ratio? What are the shortcomings of m
25、onetary policy?,46,Summary,47,Fractional reserve banking, the basis of banking today, originated with the goldsmiths in the Middle Ages.,48,Because depository institutions (banks) are not required to keep all their deposits in vault cash or with the Federal Reserve, banks create money by making loan
26、s.,49,Required reserves are the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed. The percentage of deposits that must be held as required reserves is called the required reserve ratio.,50,Excess reserves exist when a bank has more reserves than required.
27、 Excess reserves allow a bank to create money by exchanging loans for deposits. Money is reduced when excess reserves are reduced and loans are repaid.,51,The money multiplier is used to calculate the maximum change (positive or negative) in checkable deposits (money supply) due to a change in exces
28、s reserves. As a formula: $ multiplier = 1/required reserve ratio.,52,Monetary policy is action taken by the Fed to change the money supply. The Fed uses three basic tools: (1) open market operations (2) changes in the discount rate and (3) changes in the required reserve ratio.,53,Open-market opera
29、tions are the buying and selling of government securities by the Fed through its trading desk at the New York Federal Reserve Bank.,54,Buying government securities creates extra bank reserves and loans, thereby expanding the money supply. Selling government securities reduces bank reserves and loans
30、, thereby contracting the money supply.,55,Fed,Fed buys government securities and banks gain reserves,Fed sells government securities and banks loose reserves,Banks,Public,$,$,$,$,56,Changes in the discount rate occur when the Fed changes the rate of interest it charges on loans of reserves to banks
31、.,57,Dropping the discount rate makes it easier for banks to borrow reserves from the Fed and expands the money supply.,58,Raising the discount rate discourages banks from borrowing reserves from the Fed and contracts the money supply.,59,Changes in the required reserve ratio and the size of the mon
32、ey multiplier are inversely related. Thus, if the Fed decreases the required reserve ratio the money multiplier and money supply increase. If the Fed increases the required reserve ratio the money multiplier and money supply decrease.,60,Monetary policy limitations include the following: (1) The mon
33、ey multiplier can vary (2) Nonbanks, such as insurance companies, finance companies, and Sears, can offer loans and other financial services not directly under the Feds control (3) The Fed might control M1 while the public can shift funds to M2, M3, or another money supply definition (4) Time lags o
34、ccur.,61,Chapter 25 Quiz,2002 South-Western College Publishing,62,1. If a bank has total deposits of $100,000 set aside to meet reserve requirements of the Fed, its required reserve ratio is a. $10,000 b. 10 percent c. 0.1 percent d. 1 percent,B. Required reserve ratio = required deposits total depo
35、sits x 100 = $10,000 $100,000 x 100,63,2. Assume a simplified banking system in which all banks are subject to a uniform required reserve ratio of 30 percent and demand deposits are the only form of money. A bank that received a new deposit of $10,000 would be able to extend new loans up to a maximu
36、m of a. $3,000 b. $7,000 c. $10,000 d. $30,000,B. Excess reserves can be loaned. Excess reserves = total reserves - required reserves = $10,000 - (0.3 x $10,000) = $10,000 - $3,000 = $7,000,64,3. The Best National Bank operates with a 10 percent required reserve ratio. One day a depositor withdraws
37、$400 from his or her checking account at the bank. As a result, the banks excess reserves a. fall by $400 b. fall by $360 c. fall by $40 d. rise by $400,B. Excess reserves = total reserves - required reserves = -$400 - (0.10 x $400) = -$400 + $40 = -$360,65,4. If an increase in excess reserves of $1
38、00 in a simplified banking system can lead to a total expansion in bank deposits of $400, the required reserve ratio must be a. 40 percent b. 400 percent c. 25 percent d. 4 percent,C. $ multiplier = in bank deposits initial in excess reserves = 400 $100 = 4 = 1 required reserve ratio = 1 money multi
39、plier x 100.,66,5. In a simplified banking system in which all banks are subject to a 25% required reserve ratio, a $1,000 open sale by the Fed would cause the money supply to a. increase by $1,000. b. decrease by $200. c. decrease by $5,000. d. increase by $5,000.,C. Money supply change ( M1) = ini
40、tial in excess reserves x money multiplier (MM). MM = 1 required reserve ratio = 1 25/100 = 4 . M1 = $1,000 x 4 = -$4,000.,67,6. In a simplified banking system in which all banks are subject t a 20% required reserve ratio, a $1,000 open market purchase by the Fed would cause the money supply to a. i
41、ncrease by $100. b. decrease by $200. c. decrease by $5,000. d. increase by $5,000.,D. Money supply change ( M1) = initial change in excess reserves x money multiplier (MM) MM = 1 required reserve ratio = 1 20/100 = 5 M1 = $1,000 x 5 = $5,000.,68,7. The cost to a member bank of borrowing from the Fe
42、deral Reserve is measured by the a. reserve requirement. b. price of securities in the open market. c. discount rate. d. yield on government bonds.,C. The Fed provides a discount window at each of the Federal Reserve districts banks to make loans of reserves to banks and change an interest rate call
43、ed the discount rate.,69,Exhibit 5 Balance Sheet of Best National Bank,Assets,Liabilities,Required Reserves,$,Checkable deposits,$100,000,Excess Reserves,Total,$100,000,Total,$100,000,Loans,80,000,70,8. The required reserve ratio in Exhibit 5 is a. 10%. b. 15%. c. 20%. d. 25%.,C. Excess reserves = t
44、otal reserves - required reserves = $80,000 = $100,000 - required reserves = $20,000 Required reserve ratio = required deposits total deposits = $20,000 $100,000 x 100 = 20%,71,9. If the bank in Exhibit 5 received $100,000 in new deposits, its required reserves would be a. $10,000. b. $20,000. c. $3
45、0,000. d. $40,000.,B. Required reserves = required reserve ratio x new deposits = .20 x $100,000 = $20,000,72,10. Suppose Brad Rich deposits $1,000 in the bank shown in Exhibit 25.1. The result would be a. a $200 increase in excess reserves. b. a $200 increase in required reserves. c. a $1,200 incre
46、ase in required reserves. d. zero change in required reserves.,B. Required reserves = required reserve ratio x new deposits = .20 x $1,000 = $200,73,11. If all banks in the system are identical to Best National Bank, shown in Exhibit 5. A $1,000 open market sale by the Fed would a. 5. b. 10. c. 15.
47、d. 20.,A. Money multiplier = 1 required reserve ratio = 1 20/100 = 5,74,12. Assume all banks in the system are identical to Best National Bank, shown in Exhibit 5. A $1,000 open market sale by the Fed would a. expand the money supply by $1,000. b. expand the money supply by $15,000. c. contract the money supply by $1,000. d. contract the money supply by $5,000.,D. Money supply change ( M1) = initial change in excess reserves x money multiplier (MM) MM = 1 required reserve ratio = 1 20/100 = 5 M1 = $1,000 x 5 = -$5,000.,75,END,
