ch12 - When you have completed your study of this chapter,...

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When you have completed your study of this chapter, you will be able to 1. Explain how banks create money by making loans. 2. Explain how the Fed controls the quantity of money.
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12.1 HOW BANKS CREATE MONEY Creating a Bank To see how banks create money, we’ll work through the process of creating a bank and see how our new bank creates money.
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12.1 HOW BANKS CREATE MONEY We will go through eight steps: Obtain a license to operate a commercial bank Raise some financial capital Buy some equipment and computer programs Accept deposits Establish a reserve account Clear checks Buy government securities Make loans
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12.1 HOW BANKS CREATE MONEY Obtaining a Charter Apply to the Comptroller of the Currency Raising Financial Capital Virtual College Bank creates 2,000 shares, each worth $100, and sells these shares in your local community. Balance sheet A statement that summarizes assets (amounts owned) and liabilities (amounts
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12.1 HOW BANKS CREATE MONEY Table 12.1 shows Virtual College Bank’s balance sheet #1.
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12.1 HOW BANKS CREATE MONEY Buy some equipment and computer programs Buy some office equipment, a server, banking database software, and a high- speed Internet connection. These items cost you $200,000.
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12.1 HOW BANKS CREATE MONEY Table 12.2 shows Virtual College Bank’s Balance Sheet #2
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12.1 HOW BANKS CREATE MONEY Accepting Deposits Offer the best terms available and the lowest charges on checkable deposits. Deposits begin to roll in. Suppose you accept $120,000 of deposits.
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12.1 HOW BANKS CREATE MONEY Table 12.3 shows Virtual College Bank’s Balance Sheet #3
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12.1 HOW BANKS CREATE MONEY Establishing a Reserve Account Establish a reserve account at your local Federal Reserve Bank.
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12.1 HOW BANKS CREATE MONEY Table 12.4 shows Virtual College Bank’s Balance Sheet #4
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12.1 HOW BANKS CREATE MONEY Reserves: Actual and Required A bank’s required reserve ratio is the ratio of reserves to deposits that banks are required , by regulation, to hold. Suppose that the required reserve ratio is 25 percent of total deposits, A bank’s required reserves are equal to its deposits multiplied by the required reserve ratio. So Virtual College Bank’s required reserves
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12.1 HOW BANKS CREATE MONEY Actual reserves minus required reserves are excess reserves. Virtual College Bank’s excess reserves are: Excess reserves = $120,000 - $30,000 = $90,000. Whenever banks have excess reserves, they can use them to make loans.
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Clearing Checks Virtual College Bank’s depositors want to be able to make and receive payments by check. Funds must move from an account at your bank to an account at another bank. In the process, one bank loses reserves and the other bank gains reserves. Figure 12.1 on the next slide shows how a
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ch12 - When you have completed your study of this chapter,...

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