G. Money and Banking and How

1
G. Money and Banking and How
Banks Create Money
1. The process of monetary
creation...an application
2. The application of the monetary
multiplier
H. The Federal Reserve Banks and
Monetary Policy
1. Effect which open market
operations have on money supply
2. Effect which changes in reserve
requirements have on money supply
3. Effect which changes in the
discount rate have on money supply
4. Effect which changes in the money
supply have on aggregate demand
and equilibrium GDP
5. Strengths, shortcomings, and
problems with monetary policy
2
OPEN
BOARD OF
FEDERAL
MARKET
ADVISORY
GOVERNORS
COMMITTEE
BOARD
TWELVE FEDERAL
RESERVE BANKS
COMMERCIAL
BANKS
THRIFTS
1/3 NATIONAL
2/3 STATE




PUBLIC HOUSEHOLDS AND BUSINESS
3
100,000
Entire Money Supply
BANK A
BANK B
BANK C
4
100,000
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
MONEY SUPPLY!!!!!!!
Money in the banks vault is NOT part of money
supply!!!
5
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
LEGAL RESERVES--Those assets which banks
can use to meet their reserve requirements.
They consist of vault cash and the bank's
deposits at the Federal Reserve.
6
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
LEGAL RESERVES--Those assets which banks
can use to meet their reserve requirements.
They consist of vault cash and the bank's
deposits at the Federal Reserve.
7
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
8
RESERVE RATIO--That percentage of a bank's
checking deposit liabilities which must be
maintained
100,000
100,000
as legal reserves. This ratio is set by the FED.
100,000
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
9
RESERVE RATIO--That percentage of a bank's
ASSUME RESERVE RATIO
checking deposit liabilities which must be
maintained
100,000
100,000
as legal reserves. This ratio is set by the FED.
100,000
IS 20
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
10
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
100,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
20
11
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
REQUIRED 20,000
? 80,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
12
NOTE ITS 20 TIMES THE CHECKING DEPOSIT
BALANCE.. NOT 20 TIMES VAULT CASH
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
REQUIRED 20,000
? 80,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
20
13
EXCESS RESERVES--The difference between
a bank's actual legal reserves and its
100,000
100,000
100,000
required reserves.
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
REQUIRED 20,000
? 80,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
20
14
A bank can loan out its excess
100,000
100,000
reserves!!!!!!!!!!!!
100,000
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
REQUIRED 20,000
? 80,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
20
15
A bank can loan out its excess
100,000
100,000
reserves!!!!!!!!!!!!
100,000
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
100,000
REQUIRED 20,000
EXCESS 80,000
REQUIRED RESERVES--That portion of a
bank's reserves which must be
maintained. Required reserves are equal
to the reserve ratio multiplied times
the commercial bank's checking deposit
liabilities.
20
16
BANK A
ASSETS
LIABILITIES
80,000
CHECKING DEPOSITS
VAULT CASH
100,000
20,000
100,000
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
MONEY SUPPLY
Hopeful borrower
Loan Officers
17
MONEY SUPPLY NOW IS
180,000
THE ORIGINAL 100,000
PLUS
NEW 80,000
18
BANK A CANT MAKE ANY MORE LOANSITS LOANED UP
BANK A
ASSETS
LIABILITIES
80,000
CHECKING DEPOSITS
VAULT CASH
100,000
20,000
100,000
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
NOTES RECEIVABLE
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
MONEY SUPPLY
Hopeful borrower
Loan Officers
19
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
100,000
N.R. 80,000
80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
80,000
80,000
MONEY SUPPLY
20
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
100,000
N.R. 80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
REQUIRED 16,000
80,000
80,000
EXCESS 64,000
21
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
100,000
N.R. 80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
64,000
80,000
80,000
80,000
16,000
Notes receivable 64,000
Hopeful Borrower
MONEY SUPPLY
22
MONEY SUPPLY IS NOW
244,000
100,000
PLUS
80,000
PLUS
64,000
23
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
BANK B CANT MAKE ANY MORE LOANSITS LOANED UP
100,000
N.R. 80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
64,000
80,000
80,000
80,000
16,000
Notes receivable 64,000
Hopeful Borrower
MONEY SUPPLY
24
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
100,000
N.R. 80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
80,000
80,000
16,000
N.R. 64,000
64,000
BANK C
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
64,000
64,000
25
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
100,000
N.R. 80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
80,000
80,000
16,000
Money Supply
N.R. 64,000
BANK C
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
64,000
64,000
26
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
CASH 20,000
100,000
N.R. 80,000
BANK B
ASSETS
LIABILITIES
VAULT CASH
CHECKING DEPOSITS
80,000
80,000
16,000
N.R. 64,000
BANK C
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH
64,000
REQUIRED 12,800
64,000
EXCESS 51,200
27
TIME
PASSES
28
80,000
BANK A
ASSETS
LIABILITIES
CHECKING DEPOSITS
VAULT CASH 20,000
100,000
100,000
0
N.R. 80,000
(Notes Receivable)
29
WHAT HAS HAPPENED TO MONEY
SUPPLY?
30
WHAT HAS HAPPENED TO MONEY
SUPPLY?
COIN AND CURRENCY
PLUS
CHECKABLE DEPOSITS
MONEY SUPPLY
31
WHAT HAS HAPPENED TO MONEY
SUPPLY?
80,000
COIN AND CURRENCY
DOWN
PLUS
NO CHANGE
CHECKABLE DEPOSITS
80,000
MONEY SUPPLY
DOWN