Macro - Bank and Money Supply

# Macro - Bank and Money Supply - checking deposit The...

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Banks can influence the quantity of deposits in the economy and the money supply. Banks can keep a fraction of deposits as reserves and use the rest to make loans. This is a fractional reserve banking system. BANK RESERVES Banks may hold more than this minimum amount if they choose. The Fed establishes reserve requirements . Regulations on the minimum amount of reserves that banks must hold against deposits. Required Reserve is the minimum reserves required by the fed. Excess Reserve is the reserves held in excess of the required minimum. Example: The total deposits at ABC Bank are \$10 Million. Required Reserve = 1 Million Excess Reserve = 0 If the reserve requirement is 10% Required Reserve = \$1 million Excess Reserve = \$1.5 million Total Reserve = \$2.5 million If the reserve requirement is 10% but the bank decides to hold \$2.5 million An internet thief in Chicago steals \$1 million from a bank in Buenos Aires, Argentina. He transfers the funds to his checking account at a Chicago Bank. Increase by \$1 million

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Unformatted text preview: checking deposit The immediate change in money supply in USA The bank has to keep at least \$100,000 The bank immediately has \$900,000 in excess reserve. The Chicago bank can loan out this \$900,000 If the reserve requirement = `10% THE MONEY MULTIPLIER Money multiplier : the amount of money the banking system generates with each dollar of reserves. • The money multiplier equals 1/( Reserve Ration ) • Money multiplier = 1/ 0.1 = 10 ○ Example: The money multiplier = 1/0.1 = 10 Maximum eventual increase in money supply = 1 million + 900,000 + 810,000 The maximum increase = (10)*(original change) M rises by (10)*(1 million) = \$10 million If the reserve requirement is 10% ○ Reserve Ratio = 10% • Bank and Money Supply Tuesday, April 08, 2008 9:58 AM Macroeconomics Page 1 BANK AND MONEY CREATION Banks may NOT lend out all the excess reserves • Borrowers may NOT deposit all loans back into the banking system • Macroeconomics Page 2...
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Macro - Bank and Money Supply - checking deposit The...

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