ch123 - When you have completed your study of this chapter,...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Cobbe ECO2013 Fall 03 Chapter 12 P 1 of 16 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. 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. 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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Cobbe ECO2013 Fall 03 Chapter 12 P 2 of 16 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 owed). 12.1 HOW BANKS CREATE MONEY Table 12.1 shows Virtual College Bank’s balance sheet #1. 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.
Background image of page 2
Cobbe ECO2013 Fall 03 Chapter 12 P 3 of 16 12.1 HOW BANKS CREATE MONEY Table 12.2 shows Virtual College Bank’s Balance Sheet #2 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. 12.1 HOW BANKS CREATE MONEY Table 12.3 shows Virtual College Bank’s Balance Sheet #3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Cobbe ECO2013 Fall 03 Chapter 12 P 4 of 16 12.1 HOW BANKS CREATE MONEY Establishing a Reserve Account Establish a reserve account at your local Federal Reserve Bank. 12.1 HOW BANKS CREATE MONEY Table 12.4 shows Virtual College Bank’s Balance Sheet #4 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 are: Required reserves = $120,000 x 25 ÷100 = $30,000.
Background image of page 4
Cobbe ECO2013 Fall 03 Chapter 12 P 5 of 16 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. 12.1 HOW BANKS CREATE MONEY
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 16

ch123 - When you have completed your study of this chapter,...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online