Cobbe ECO2013 Fall 03 Chapter 12P 1 of 16When you have completed your study of this chapter,you will be able to1. Explain how banks create money by making loans.2. Explain how the Fed controls the quantity of money.12.1 HOW BANKS CREATE MONEY<Creating a BankTo see how banks create money, we’ll work through the process of creating a bank and see how our new bank creates money.12.1 HOW BANKS CREATE MONEYWe 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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Cobbe ECO2013 Fall 03 Chapter 12P 2 of 1612.1 HOW BANKS CREATE MONEYObtaining a CharterApply to the Comptroller of the CurrencyRaising Financial CapitalVirtual College Bank creates 2,000 shares, each worth $100, and sells these shares in your local community.Balance sheetA statement that summarizes assets (amounts owned) and liabilities (amounts owed).12.1 HOW BANKS CREATE MONEYTable 12.1 shows Virtual College Bank’s balance sheet #1. 12.1 HOW BANKS CREATE MONEYBuy some equipment and computer programsBuy some office equipment, a server, banking database software, and a high-speed Internet connection. These items cost you $200,000.