Give me a loan so
there will be more
DD in the system.
How Banks Create Money [MS]
MS = Currency + DD of Public
Banks [thru loans] Create More DD
1. Fractional Reserve Banking System – a fraction of DD are kept in
reserve(say, 10%) at either the bank’s vault or at the Fed.
2. Vault cash – cash held by a bank (banks rarely keep more than 2% of their in cash)
3. Required Reserve(RR)–specified percentage of DD that banks must keep as RR.
4. Excess reserves – total reserves(TR) – RR. ER is what can be loaned out.
5.
6.
Also some ER is used to meet sudden withdrawal demands.
Actual(Total) reserves – RR + ER.
Deposit Multiplier – one/RR or 1/.10 or $1/10 cents or 10
Multipliers 1/RR[$1/5 cents = 20]
1/5% = 20
1/25% = 4
1/10% = 10
1/33.3%= 3
1/12.5% = 8
1/40 = 2.5
1/20% = 5
1/50% = 2
7. Balance Sheet–statement of assets & liabilities[assets=liabilities].
8. Discount Rate – when banks borrow from the Fed. [symbolic-emergencies]
“wholesale price of money”
9. Federal Funds Rate – banks borrow from other banks for overnight loans.
10. Prime Rate – when a bank’s prime customers [good credit] get loans.
“retail price of money”
11. Buying Bonds – “buying” bonds means “bigger ” supply of money
and “lower interest rates”. [So, more “C”, “Ig”, and “Xn” ]
12. Selling Bonds – “selling” bonds mea ns “smaller” supply of money and
“higher interest rates”. [So, less “C”, “Ig”, and “Xn”]
How Banks and Thrifts Create Money
Dennis Rodman deposits $1 with A 10% RR
Rodman’s
.10
RR
90 cents
Excess Reserves
Total (Actual) Reserves
One Dollar
One bank’s loan becomes
another bank’s DD.
PMC = M x ER, so 10 x .90 =$9
TMS = PMC[$9] + DD[$1] = $10
[MS = Currency + DD of Public]
Rodman’s Bank Borrows $1 From The Fed [10% RR]
Rodman’s Bank
0
Fed
One Dollar
RR Excess Reserves
Total(Actual) Reserves
One Dollar
PMC = M x ER, so 10 x $1 = $10
TMS [$10] = PMC[$10]
[MS = Currency + DD of Public]
BALANCE SHEET OF A COMMERCIAL BANK
ASSETS [cash]
=
[The cash is property of the bank]
Cash $100,000
LIABILITIES[DD]
[“liable”, DDs are owed to depositors]
DD $100,000
The Goldsmiths
Fractional Reserve Banking System
Money Creation & Reserves
[The current 10% RR is kept in a bank’s vault or
in a Fed vault.]
Bank Panics and Regulation
$1,000 DD by Calli [MS=Currency+DD of Public]
New Deposits
[New Reserves]
DD
Bank
DD Created By
New Loans
[equal to new ER]
New Required
Reserves
RR=10%
A
$1,000.00
$100.00
900.00
900.00
B
900.00
$90.00
810.00
C
810.00
$81.00
729.00
D
729.00
$72.90
656.10
PMC = ER[$900] x M[10]
Erin’s DD
+
PMC
$1,000.00 + $9,000.00
=
=
Dog that can YoYo
One year “all u can
eat” hot wings at
Hooters
$729.00 for a
“cat bodyguard”
PMC = $9,000.00
TMS
Smoking cat
$10,000.00
MS grows by
multiple of 10
$1,000 DD by Marie [MS=Currency+DD of Public]
New Deposits
[New Reserves]
Bank
DD
DD Created By
New Loans
[equal to new ER]
New Required
Reserves
RR=20%
A
$1,000.00
$200.00
800.00
B
800.00
$160.00
640.00
C
640.00
$128.00
512.00
D
512.00
$102.40
+
PMC
$1,000.00 + $4,000.00
Purchase of a
donkey
Two Monkeys
409.60
PMC = ER[$800 x M[5]
Marie’s DD
Hair care
for 1 year
=
=
PMC = $4,000.00
TMS
A chauffeur dog
$5,000.00
MS grows by
multiple of 5
$1,000 DD by Emily [MS=Currency+DD of Public]
New Deposits
[New Reserves]
DD
Bank
DD Created By
New Loans
[equal to new ER]
New Required
Reserves
RR=25%
A
$1,000.00
$250.00
750.00
B
750.00
$188.00
562.00
C
562.00
$140.00
422.00
D
422.00
$105.00
317.00
E
317.00
$80.00
237.00
PMC = ER[$750] x M[4]
Em’s DD
+
PMC
$1,000.00 + $3,000.00
PMC = $
=
3,000.00
Shark to keep
in bathtub
Prom date
w.
Linda Blair
Frog with
teeth
Teach Stuart Little how
to brush his teeth
Cat with
human teeth
TMS
=
$4,000.00
MS grows by
multiple of 4
MS = DD + Currency of the Public
[A DD of $10,000 will increase MS by another $40,000($50,000 MS]
RR=20%
MS
$10,000
$8,000
$6,400
$24,400
MS is
$10,000
1. Joe Biker deposits
$10,000 in his bank.
RR = 20%
4. 2nd Bank lends Sports Shop $6,400.
MS
$10,000
$8,000
$18,000
2. Suzie Rah Rah borrows $8,000
5. Eventually the MS will be $50,000
Joe
3. Suzie pays $8,000 for a new car.
GoNow Auto deposits the $ in 2nd Bank.
$10,000+$40,000=$50,000
Most Famous “Panic Run” in Movie History
Another Famous “Panic Run” in Movie History
The children wanted to use their tuppance to buy bread crumbs to
feed the pigeons, instead of investing it at the bank. When they said,
“We want our money”, the other depositors thought it was a “bank run”.
[nominated for a record 13 academy awards - won 6]
History of Deposit Insurance
In 1934, federal
deposit insurance
made its debut at
$2,500 to protect
the average family’s
savings and end the
bank runs that had
shut down businesses
and contributed to the
Great Depression.
Through the years
the coverage rose
in $5,000 increments
until the 70s when it
jumped to $40,000.
In 1980, it was raised
to $100,000.
The Very Early Days Of Banking
Greatest
invention
since
sliced bread
There were
more claims
to gold than
there were
ounces of
gold.
“Wow, you mean we
can create money
out of thin air.?”
The fractional banking system
began when someone issued
claims for gold that already
belonged to someone else.
Once upon a time there was a gold-smithy who offered to store people’s
gold in his vault. He issued paper receipts for the gold, and it was not long
before the townsfolk used the paper to purchase eggs and beer. The smithy’s
paper receipts [first checks] became as “good as gold.”
Our Smithy was not stupid. He said to himself. “I have 2000 ounces of gold
stored in my vault, but in the last year I was never called upon to pay out
more than 100 ounces in a single day. What harm could it do if I lent out say,
half the gold I now have? I’ll still have more than enough to pay off any
depositors that come in for a withdrawal. No one will know the difference. I
could earn 30 additional ounces of gold each week. I think I’ll do it.”
“The smithy has invented the Fractional Reserve Banking System.”
Advantages of Lending [One disadvantage was the possibility of “bank runs”]
1. Depositors haven’t lost money [Goldsmiths paid them instead of other way]
2. With the interest you earned you could give some to depositors.
3. The loans benefited the community thru loans
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
ASSETS [own]
LIABILITIES & NET WORTH [owe]
TRANSACTION
1
Creating a bank
$250,000 Cash
for
Capital Stock
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
LIABILITIES & NET WORTH [owe]
ASSETS [own]
Cash
$250,000
Capital Stock
$250,000
Deposit Added to Vault Cash
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
LIABILITIES & NET WORTH [owe]
ASSETS [own]
Cash
$250,000
TRANSACTION
2
Acquiring
Property and
Equipment
$240,000 Cash
Capital Stock
$250,000
Birth OF A COMMERCIAL BANK
In Lovelady, Texas
ASSETS [own]
Cash
Property
LIABILITIES & NET WORTH [owe]
$ 10,000
240,000
Capital Stock
Lovelady Bank
$250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
Cash
Property
LIABILITIES and NET WORTH
$ 10,000
240,000
Capital Stock
$250,000
TRANSACTION
3
Accepting
Deposits
$100,000 Cash
$250,000
$250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
LIABILITIES and NET WORTH
ASSETS
[Was $10,000]
Cash
Property
$110,000
$240,000
DD
Capital Stock
$100,000
250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
[Was $10,000]
Cash
Property
LIABILITIES and NET WORTH
$110,000
240,000
$350,000
DD
Capital Stock
$100,000
250,000
$350,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
Cash
Property
LIABILITIES & NET WORTH
$110,000
240,000
$350,000
TRANSACTION
4
A $50,000
check is written
against the bank
DD
Capital Stock
$100,000
250,000
$350,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
[was $110,000]
Cash
Property
LIABILITIES & NET WORTH
$ 60,000
240,000
$300,000
DD
Capital Stock
$ 50,000
250,000
$300,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
NOTES:
Banks create money
by lending ER and
destroy money by
loan repayment.
Purchasing bonds
from the public also
creates money.
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
LIABILITY and NET WORTH
ASSETS
Cash
Property
$ 60,000
240,000
TRANSACTION
5
Make a loan
from excess
reserves
of $50,000
DD
Capital Stock
$ 50,000
250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
LIABILITIES and NET WORTH
ASSETS
Cash
Loans
Property
$ 60,000
50,000
240,000
DD
Capital Stock
Making the loan
created money!
$100,000
250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
LIABILITIES AND NET WORTH
ASSETS
Cash
Loans
Property
$ 60,000
0
240,000
DD
Capital Stock
$ 50,000
250,000
After a check for the $50,000
is written against the bank
Balance Sheet:
Lovelady Bank
[Joe Bozo buys 50 HP computers at $1,000 each, so
writes $50,000 check to Best Buy in Hateman, Texas]
Joe Bozo
Federal Reserve Bank of Dallas
Assets
Liabilities & Net Worth
FEDERAL RESERVE BANK OF THE
U.S.
Dallas
Big “D”
(c) Cleared check is
returned to Lovelady Bank
Reserves
-$50,000
Lovelady Bank
(b) Hateman Bank sends
check for collection
Hateman Bank
Lovelady Bank
Assets
Reserves of Lovelady Bank
- $50,000
Reserves of Hateman Bank
+ $50,000
Liabilities & Net Worth
Assets
DD -$50,000
Reserves
Liabilities & Net Worth
+$50,000 DD
+$50,000
Hateman Bank
(a) Joe Bozo pays Best Buy
(a) Joe Bozo pays Best Buy with a $50,000 check.
a $50,000 check
And What Happens If A Turtle Doesn’t
Keep Up with His Mortgage Payments
This turtle is subject to
foreclosure on his
house.
Here, he has lost his
house.
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
Reserves
Loans
Property
LIABILITIES and NET WORTH
$ 10,000
50,000
240,000
TRANSACTION
6
Repaying a loan
with cash
$50,000
DD
Capital Stock
$ 50,000
250,000
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
Reserves
Loans
Property
LIABILITIES and NET WORTH
$ 10,000
0
240,000
DD
Capital Stock
$0
250,000
$50,000 in money supply
is destroyed!
MULTIPLE DEPOSIT EXPANSION PROCESS
RR= 20%
Bank
Acquired reserves Required
and deposits
reserves
A
$100.00
B
80.00
C
64.00
D
51.20
E
40.96
F
32.77
G
26.22
H
20.98
I
16.78
J
13.42
K
10.74
L
8.59
M
6.87
N
5.50
Other banks 21.97
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
P MC in the banking system [MxER]
Excess
reserves
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
Amount bank
can lend - New
money created
$80.00
64.00
51.20 1st
40.96 10
32.77 $357
26.22 of
20.98 the
16.78 $400
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$400.00
TMS = $500.00
THE Money [Deposit] MULTIPLIER
MM
=
1
RR
The MM is the reciprocal of the RR.
Maximum
Potential money
checkableCreation
in the
Bankingdeposit
System
expansion
[PMC]
= ER x MM
Ashley Olsen Deposits $1,000 in her bank
RR = 25%
Ashley Olsen’s
$1,000
New reserves
$750 $250
Excess
reserves
RR
Ashley Olsen
deposits $1,000
$3,000
PMC thru bank lending
TMS = $4,000
$1,000
Initial
Deposit
Fed Buys A $1,000 Bond From Ashley’s Bank
Ashley Olsen’s
New reserves
$1,000
Excess
Reserves
25% RR
$4,000
PMC thru Bank Lending
TMS is $4000
NS 31-35 AP Econ [MS = Currrency + DD of Public]
RR+ER=TR; TR-RR=ER; TR-ER=RR; MXER=PMC; PMC(Public)+DD=TMS; PMC(Fed)=TMS
Excess Reserves prior to new currency deposit (DD) = $0
Britney Spears deposits in the banking system = $40 million
Legal Reserve Requirement [RR] = 20%
31. The $40 million deposit of Currency into DD would result in MS
staying at ($8/$40/$160) million. [MS composition changed from currency to DD]
32. The $40 million deposit of currency into
checking accounts will create ER of ($20/$32/$40) million.
33. The Potential Money Creation of the banking system
through loans is ($40/$160/$$200) mil. The Potential TMS
[all DD of the public] could be as much as ($40/$160/$200) mil.
34. The RR applies to checkable deposits at (banks/S&Ls/
credit unions/ all depository institutions).
35. If the Duck National Bank has ER of $6,000 & DD of $100,000
what is the size of the bank’s TR if the RR is 25%?
25,000
6,000
31,000
($25,000/$75,000/$31,000) [RR($____)+ER($___)+TR($____)
NS 36-45
[MS = Currrency+DD of Public]
RR+ER=TR; TR-RR=ER; TR-ER=RR; MXER=PMC; PMC(Public)+DD=TMS; PMC(Fed)=TMS
36. A stranger deposits $1,000 in a bank that has a RR of 10%. The
maximum possible change in the dollar value of the local bank’s loans would
900
be $______.
PMC[M X ER] in the banking system is $_____.
9,000 Potential TMS
10,000
could become as high as $_______.
37. Suppose a commercial bank has DD of $100,000 and the RR is 10%.
If the bank’s RR & ER are equal, then its TR are ($10,000/$20,000/$30,000).
38. Total Reserves (minus/plus) RR = ER.
39. Suppose the Thunderduck Bank has DD of $500,000 & the RR is 10%.
If the institution has ER of $4,000 then its TR are ($46,000/$54,000/$4,000).
40. If ER in a bank are $4,000, DD are $40,000, & the RR is 10%, then
TR are ($4,000/$8,000).
41. The main purpose of the RR is to (have funds for emergency withdrawals/
influence the lending ability of commercial banks).
42. If I write you a check for $1 & we both have our checking accts at the
Poorman Bank, the bank’s balance sheet will (increase/decrease/be unchanged).
43. Banks (create/destroy) money when they make loans and repaying bank
loans (create/destroy) money.
44. When a bank loan is repaid the MS is (increased/decreased).
45. The Fed Funds rate is a loan by one bank (to another bank/from the Fed).
NS 46-47
[MS = Currrency+DD of Public]
RR+ER=TR; TR-RR=ER; TR-ER=RR; MXER=PMC; PMC(Public)+DD=TMS; PMC(Fed)=TMS
46. If the RR was lowered [say, from 50% to 10%], the size of the
monetary multiplier [MM] would (increase/decrease).
Leakages (limitations) of the Money Creating Process
1. Cash leakages [taking part of loan in cash]
2. ER (banks don’t loan it or we don’t borrow]
47. If borrowers take a portion of their loans as cash, the maximum amount by
which the banking system increases the MS by lending will (increase/decrease).
Money Supply = DD + Currency of the Public
ER
“PMC”
Loans
$100[10% RR] [1st Bank] [1st Bank]
Banks/Public DD [$100]
$90
$90
Fed /Public/Banks DD[$100]
$90
$90
“PMC”
Crea. In
“TMS”
“Potential”
System
Total MS
$900
$1,000
$900
$1,000
[*Fed buys bonds from public who put the money in their DD]
Banks/Fed
Fed Loan[$100]
$100
[or sells bonds to Fed]
ER
$100
“PMC”
Loans
$1,000
$100 [20% RR] [1st Bank] [1st Bank]
Banks/Public DD [$100]
$80
$80
Fed/Public/Banks DD [$100]
$80
$80
“PMC”
Crea. In
$1,000
“TMS”
“Potential”
System
Total MS
$400
$500
$400
$500
[*Fed buys bonds from public who put the money in their DD]
Banks/Fed
Fed Loan[$100]
$100
[or sells bonds to Fed]
$100
$500
$500
Sanjaya Deposits $1,000 In His Bank
[RR is 20%]
New reserves
$800
$200
Excess
Reserves
RR
Sanjaya’s
Sanjaya
[member of the public]
$4000
PMC thru Bank Lending
TMS is $5,000
$1000
Initial
Deposit
Fed buys a $1,000 Bond from Sanjaya’s Bank
New reserves
20% RR
Fed
$1,000
Sanjaya’s
Excess
Reserves
$5,000
PMC thru Bank System Lending
TMS is
$5000
Eva Longoria Deposits $1 with a 20% RR
Eva Longoria’s
.20
80 cents
RR Excess Reserves
Total(Actual) Reserves
One Dollar
PMC = M x ER, so 5 x .80 = $4
TMS = PMC[$4] + DD[$1] = $5
[MS = Currency + DD of Public]
Eva’s Bank Borrows $1 From The Fed [20% RR]
Fed
Eva Longoria’s
0
RR
One Dollar
Excess
Reserves
Total(Actual)
Reserves
One Dollar
PMC = M x ER, so 5 x $1 = $5
TMS [$5] = PMC [$5]
[MS = currency + DD of Public]
$1,000 DD by Katy
New Deposits
[New Reserves]
DD
Bank
[MS=Currency+DD of Public]
DD Created By
New Required
Reserves
New Loans
[equal to new ER]
RR=50%
A
$5,000.00 $2,500.00
2,500.00
B
2,500.00 $1,250.00
1,250.00
C
1,250.00 $625.00
625.00
D
625.00
$312.50
312.50
PMC = ER[$2,500 x M[2]
Katy’s DD
+
PMC
$5,000.00 + $5,000.00
=
=
PMC = $5,000.00
Duck that
can
dance
Dance
Lessons w.
Laura Bush
Hunting with
Dick Cheney
Prom Dance
lessons with
N. Dynamite
TMS
$10,000.00
MS grows by
multiple of 2
Money Creation Formulas
[MS = Currency + DD of public]
Public
RR + ER = TR
TR - RR = ER
TR - ER = RR
Public: Student deposits $1.00 in a bank
1. ER [DD-RR] x MM = PMC
2. PMC + 1st DD =TMS
Fed
No Public: [Fed gives $1.00 loan to a bank]
1. ER x MM = PMC & TMS
Banks and the Fed
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=TMS]
MS = Currency + DD of Public
[Money borrowed from the Fed [or gained thru bond sales] is ER & can be loaned out]
9. RR is 25%; Econ Bank borrows $25,000 from the Fed; its ER are increased by
25,000 Potential Money Creation in the system is $_______.
$______.
100,000
100,000 Potential TMS is $_______.
10. RR is 50%; a bank borrows $20,000 from the Fed; this one bank’s ER are increased
40,000
40,000 Potential TMS is $______
by $_____.
20,000 Potential Money Creation in the system is $______.
11. RR is 20%; the Duck Bank sells $10 M of bonds to the Fed; Duck Bank’s ER are
increased by $___million.
PMC in the system is $__________.
50 million
50 million TMS is $__________.
10
12. RR is 20%; Fed buys $50,000 of securities from Keynes Bank. Its ER are
increased by $___________.
Potential Money Creation in the banking system is
50,000
$______________.
Potential TMS is $___________.
250,000
250,000
13. 25% RR; Fed buys $400 million of bonds from the Friar Bank. This one
400
bank’s ER are increased by $_____million.
14. RR is 50%; the Fed sells $200 million of bonds to a bank; its ER are
(increased/decreased) by $_______.
200 M Potential Money Creation in the
400 M
banking system is (increased/decreased) by $________.
15. RR is 10%; a bank borrows $10 million from the Fed; this one bank’s
ER are increased by $_______
million. PMC in the banking system is
10
$_______million.
Potential TMS is $_______million.
100
100
Banks and the Public
RR+ER=TR; TR-RR=ER; TR-ER=RR; M x ER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=TMS
MS = currency + DD of Public
Banks & Public (all DD of Public are subject to the RR; rest is ER & can be loaned out)
1. No ER & RR is 20%; DD of $10 M is made in the Thunder Bank. MS is
$___million.
ER increase by $___million.
Potential Money Creation in the
10
8
banking system is $_____M.
Potential TMS is $____million.
40
50
2. There are no ER & RR is 25% & $16,000 is deposited in the Duck Bank. MS is
$_______.
16,000 This one bank can increase its loans by a maximum of
48,000
$_______.
12,000 Potential Money Creation in the banking system is $_______.
64,000
Potential Total Money Supply could be $__________.
3. Econ Bank has ER of $5,000; DD are $100,000; RR is 25%. TR are $_______.
30,000
4. DD are $10,000; ER are $1,000; TR are $3,000; RR are $2,000
_________. [TR-ER=RR].
$50,000
5. Nomics Bank has ER of $10,000; DD of $100,000; RR of 40%. TR are _________.
With ER above, Potential Money Creation in the banking system is $__________.
25,000
6. Friar Bank has DD of $100,000; RR is 20%; RR & ER are equal. TR are $________.
40,000
7. If ER in a bank are $10,000; DD are $200,000, & the RR are 10%. TR are $_______.
30,000
100,000 This single bank can
8. No ER & RR is 25%. DD of $100,000 is made. MS is $_______.
75,000 PMC in the system is $________.
increase its loans by $_______.
300,000 TMS is $________.
400,000
Fed
and the Public
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=TMS]
MS = Currency + DD of the Public
[When Fed buys securities from Public, they will put the money in their DD]
16. RR is 50%; Fed buys $10 M of bonds from the Public. MS is increased by _______.
$10 M
$20 M
ER are increased by $5
____.
_______.
M PMC in the system is $10
M Potential TMS is _______.
17. RR is 25%; Fed buys $100 M of bonds from the Public. The MS is increased _______.
$100 M
ER are increased by ______.
_______.
________.
$75 M PMC in the system is $300
M Potential TMS is $400
M
18. RR is 50%; Fed sells $200 M of bonds to the Public. The MS is (incr/decr) by
$100 M PMC in the banking system is
__________.
$200 M ER are (incr/decr) by _________.
M
(increased/decreased) by $200
_______.
__________.
M Potential TMS is (incr/decr) by $400
19. RR is 20%; Fed buys $5 million of securities from the Public. The MS
$5 M ER are increased by _______.
is increased by _______.
$4 M Potential Money
$25 M
M Potential TMS is _________.
Creation in the banking system is$20
_______.
20. RR is 10%; Fed buys $50 million of bonds from the Public. The MS is
$50 M ER are increased by _______.
$45 M PMC in the banking
increased by _______.
$500 M
$450 M Potential Total Money Supply is __________.
system is __________.
1. The RR is 20% & Boo Radley deposits $10,000 in the Econ Bank
that he has been saving in a coffee can in a tree. The impact of this
transaction on the ER of the Econ Bank & the potential increase in
the money supply would be: [Remember: MS = Currency + DD of public]
(A) ER would increase by $10,000 & the maximum increase in TMS would be $50,000.
(B) ER would increase by $8,000 & the maximum increase in TMS would be $50,000
(C) ER would increase by $8,000 & the maximum increase in MS would be $40,000
(D) ER would increase by $10,000 & the maximum increase in MS would be $40,000.
(E) ER would increase by $40,000 & the maximum increase in MS would be $50,000.
Boo
The MS [Cash or DD of the public] was $10,000 cash. When he deposited the $10,000, the Econ
Bank could loan out ER of $8,000. The $8,000 x MM of 5 became $40,000 for TMS of $50,000.
So, $10,000 MS of cash increased MS by $40,000 to get the total money supply of $50,000.
Boo
1. RR is 20% & Boo Radley’s Bank borrows $10,000 from the Fed.
The impact of this loan on the bank’s ER and then TMS are:
[Remember again: MS = Currency + DD of public]
(A) ER would increase by $10,000 & the maximum increase in TMS would be $50,000.
(B) ER would increase by $8,000 & the maximum increase in TMS would be $50,000
(C) ER would increase by $8,000 & the maximum increase in MS would be $40,000
(D) ER would increase by $10,000 & the maximum increase in MS would be $40,000.
(E) ER would increase by $40,000 & the maximum increase in MS would be $50,000.
All of the $10,000 loan would be ER. Boo Bank could loan it all out so it could result in a PMC and TMS
of $50,000. [MM of 10 x $10,000 = $50,000]
Suppose that all banks keep only the minimum reserves required
by law and that there are no currency drains. The legal RR is
10%. If Emilia deposits the $100 bill she received as a
graduation gift from her grandfather into her checking account,
the maximum increase in the total money supply will be
a. $10
b. $100
c. $900
d. $1,000
e. $1,100
Remember that currency is also MS. So, the $100 bill was MS when
this began. When little Emilia deposited the $100, the composition
of the MS didn’t increase. It just changed from currency to DD.
Now, with the RR at 10%, $90 was loaned by the first bank and with
a MM of 10, the MS increased by $900 more as the TMS eventually
became $10,000.
[MS=Curr. + DD of Public]
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1stDD=TMS; PMC(Fed)=TMS]
Commercial Banks
Fed
Public
1. The Hale Bank [with no ER] borrows $100,000 from the Fed. With RR of 50%
$100,000
the Hale Bank can increase its loans by a maximum of __________.
PMC in
$200,000 Potential TMS is ______________.
the banking system is __________.
$200,000
$2,000
2. The Davis Bank has DD of $10,000; RR is 10%; RR & ER are equal. TR are ______.
3. RR is 20%; Fed buys $50,000 of securities from the public [Sarah Palmer]
$200,000 Potential TMS is ____________.
PMC in the banking system is __________.
$250,000
4. RR is 40%; Buzon Bank borrows $1 million from the Fed. This bank can increase
1 million
$2.5 mil. TMS is __________.
$2.5 M
its loans by a maximum of $_______
__. PMC is __________.
5. RR is 10% & there are no ER; $10,000 is deposited in the Rodriquez Bank.
$9,000 Possible Money
This bank can increase its loans by a maximum of __________.
$100,000
Creation in the banking system is ___________.
$90,000 Potential TMs is _____________.
6. There are no ER in the Vehslage Bank. Nicole now deposits $10.00. With
$40.00 Potential TMS is ___________.
$50.00
a RR of 20%, PMC in the system is __________.
7. The Terrones Bank has a RR of 50%; the Fed buys $50 million of bonds from
this bank. PMC in the system is __________.
$100 M Potential TMS is __________.
$100 M
$70,000
8. Marin Bank has ER of $50,000; DD of $100,000, & a RR of 20%. TR are ________.
9. RR is 40%; the Collins Bank borrows $10 million from the Fed. This bank’s ER
$25 M
$25 M
are increased by _________.
Potential TMS is ___________.
$10 M PMC is __________.
10. RR is 10%; Tran Bank borrows $5 from the Fed; the Tran Bank’s ER
$5.00 PMC is __________.
are increased by _______.
$50.00 Potential TMS is __________.
$50.00
[MS = Currency + DD of Public]
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(Public)+1st DD=TMS; PMC(Fed)=PMC]
Banks
Fed
Public
$100,000
1. RR is 25% & the Boase Bank has no ER. Geof deposits(DD) $100,000 there. This
bank can increase its loans by a maximum of $75,000
______. PMC is $300,000
______. TMS is $400,000
_______.
2. RR is 50%; the Stansbury Plaza Bank borrows $100,000 from the Fed. This one bank can
$100,000 PMC is$200,000
increase its loans by a maximum of ________.
_______. TMS is $200,000
________.
3. RR is 25%; Fed buys $100,000 of securities from the public [Mary Gangel].
Potential Money Creation in the system is $300,000
________. Potential TMS is _________.
$400,000
4. The Curtis Bank has DD of $200,000; RR is 10%; RR & ER are equal. TR are _______.
$40,000
5. The Recsnik Bank, with no ER, borrows $200,000 from the Fed. With a RR of 10%,
$2 million
this bank can increase its loans by _________.
$200,000 PMC in the system is __________.
6. RR is 20%; the Morell Bank borrows $1 from the Fed; this bank can increase
its loans by a maximum of _________.
$1.00 PMC in the banking system is __________.
$5.00
7. RR is 50%; the Cusimano Bank borrows $1 million from the Fed; this bank’s ER
million TMS is $2
are increased by $1
_______.
__________.
__________.
million
mil. PMC in the system is $2
8. The Masters Bank has ER of $20,000; DD of $200,000, & a RR of 10%. TR are ______.
$40,000
9. RR is 25%; Fed buys $100 million of bonds from the Green Bank. Potential
$400 million
$400 mil. Potential TMS is ____________.
Money creation in the banking system is ________.
10. There are no ER in the Farrell Bank. Erin deposits $2.50. With RR of 20%,
$12.50
PMC in the banking system is ____________.
Potential TMS is _____________.
$10.00
[MS = Curr. + DD of Public]
[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC;PMC(Public)+1st DD=TMS; PMC(Fed)=TMS]
Commercial Banks
Fed
Public
1. RR is 5% & there are no ER in the Vehslage Bank. Trey deposits[DD] $1.00
there. This one bank can increase its loans by a maximum of _______.
.95
2. RR is 25%; the Rigal Bank borrows $1 million from the Fed.
$1 million
This one bank can increase its loans by a maximum of ____________.
3. RR is 50%; the Fed buys $100,000 of securities from the public [Kate Wells].
$100,000
Potential Money Creation in the banking system is ____________.
4. The Secker-Dog Killing Bank has DD of $400,000; RR is 10%; RR & ER are equal.
$80,000
TR are ____________.
5. The Terrones Bank , with no ER, borrows $500,000 from the Fed. With a RR
$500,000
of 10%, how much can this single bank increase its loans? ____________
6. RR is 20%; the Fed buys $25,000 of securities from the public [Natalie Marin].
Potential Money Creation in the banking system is ____________.
$100,000
7. RR is 20%; the Rodriquez-Loser Bank borrows $1 million from the Fed.
$1 million
This single bank’s ER are increased by ____________.
8. RR is 25%; Fed buys $200 million of securities from the public [Rose].
$800 million
Potential Total Money Supply[TMS] could be as much as _______________.
9. The RR is 25% & the Fed buys $10 million of bonds from the Hicks Bank.
$30 million
Potential Money Creation in the banking system could be ____________.
10. There are no excess reserves in the Stansbury Bank. With RR of 50%, Courtney
$50.00
deposits [DD] $50.00 there. Potential Money Creation in the system is _________.
RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC[Public]+1st DD=TMS; PMC[Fed]= TMS
1. If the RR is 40% and the Fed buys $100 M of bonds from
$100 M ER are
the public [Sarah], then the MS is increased by _______.
$60 M PMC is _______.
$150 M TMS would be ______.
$250 M
increased by ______.
2. RR is 50% and the Bolding Bank borrows $100 M from the
0
Fed. As a result, RR are increased by ______.
ER is increased
$200 M
$100 M
by _______.
PMC and TMS is increased by ________.
3. Collins Bank has DD of $400,000 and the RR is 25%. If RR
$200,000
and ER are equal, then TR are _______.
4. The Tran Bank has ER of $60,000 & DD is $200,000.
$100,000
If the RR is 20%, TR are _________.
5. RR is 20% & the Fed buys $50 million of bonds from the
$50 M ER are increased
public [Geof B.]. The MS is increased by _______.
$200 M
$250 M
$40 M
by _______.
PMC is _______.
TMS would be _________.
Banks
Public
Fed
Money Creation Problems from the 2005 Macro MC Exam
(87%) 40. Under a fractional reserve banking system, banks are required to
a. keep part of their demand deposits as reserves
b. expand the money supply when requested by the central bank
c. insure their deposits against losses and bank runs
d. pay a fraction of their interest income in taxes
e. charge the same interest rate on all their loans
(72%) 41. If a commercial bank has no ER and the RR is 10%, what is the value of
new loans this single bank can issue if a new customer deposits $10,000?
a. $100,000 b. $90,333 c. $10,000 d. $9,000 e. $1,000
The TR: $15,000, Securities: $70,000, and
Liabilities
Loan: $15,000 total up to the $100,000 DD.
DD: $100,000 This bank would have to keep $12,000 of
their $100,000 in RR. With TR of $15,000,
they have $3,000 in ER to loan.
Assets
Total Reserves: $15,000
Securities:
$70,000
Loan:
$15,000
(37%) 42. A commercial bank is facing the conditions given above. If the RR is 12%
and the bank does not sell any of its securities, the maximum amount of
additional lending this bank can undertake is
a. $15,000 b. $12,000 c. $3,000 d. $1,800 e. 0
(53%) 43. Assume the RR is 20%, but banks voluntarily keep some excess reserves.
A $1 million increase in new reserves will result in
They
could increase
M, but
a. an increase in the MS of $5 million
c. decrease
in MSMS
of by
$1 $5
million
they
keeping
in ER,
somillion
MS
b. an increase in the MS of less than $5 million
d. are
decrease
insome
the MS
of $5
will increase by less than $5 million.
e. a decrease in the MS of more than $5 million
The End