Chapter 13

# Chapter 13 - Money Creation CHAPTER THIRTEEN MONEY CREATION...

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CHAPTER THIRTEEN MONEY CREATION INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Recount the story of how fractional reserves began with goldsmiths. 2. Explain the effects of a currency deposit in a checking account on the composition and size of the money supply. 3. Compute a bank’s required and excess reserves when you are given its balance-sheet figures. 4. Explain why a commercial bank is required to maintain a reserve and why it isn’t sufficient to cover deposits. 5. Describe what happens to the money supply when a commercial bank makes a loan or buys securities. 6. Describe what happens to the money supply when a loan is repaid or a bank sells its securities. 7. Explain what happens to a commercial bank’s reserves and checkable deposits after it has made a loan. 8. Describe how a check drawn on one commercial bank and deposited in another will affect the reserves and excess reserves in each bank after the check clears. 9. Describe what would happen to a single bank’s reserves if it made loans that exceeded its excess reserves. 10. Explain how it is possible for the banking system to create an amount of money that is a multiple of its excess reserves when no single bank ever creates money greater than its excess reserves. 11. Compute the size of the monetary multiplier and the money-creating potential of the banking system when provided with appropriate data. 12. Explain that the money multiplier process can also lead to multiple destruction of money. 13. Define and identify the terms and concepts at the end of the chapter. LECTURE NOTES I. Learning objectives – In this chapter students will learn: A. Why the U.S. banking system is called a “fractional reserve” system. B. The distinction between a bank’s actual reserves and its required reserves. C. How a bank can create money through granting loans. D. About the multiple expansion of loans and money by the entire banking system. E. What the monetary multiplier is and how to calculate it. II. Introduction: Although we are fascinated by large sums of currency, people use checkable deposits for most transactions. A. Most transaction accounts are “created” as a result of loans from banks or thrifts. B. This chapter demonstrates the money-creating abilities of a single bank or thrift and then looks at that of the system as a whole. 193

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Chapter 13 - Money Creation CHAPTER THIRTEEN MONEY CREATION...

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