Fractional_Reserve_Banking

Fractional_Reserve_Banking - Creating Money Through the...

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Creating Money Through the Banking System Multiple Deposit Creation
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Money and Banking The largest component of the money supply is bank deposits. To understand how the Central Bank influences the supply of money in the economy, we need to examine the linkages between: The Central Bank The private banking system Depositors Borrowers The interactions between these four groups have direct effects on the money supply
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Fractional Reserve Banking So far we have been assuming that banks hold the entire amount of their deposits in reserve. Clearly this is a false assumption as banks rarely ever have enough currency in their vaults (or on reserve at the Fed) to cover all deposits made with them. The banking system operates as a fractional reserve system in which only a portion of the banks deposits are held in reserve. The Fed sets a lower limit for the fraction of deposits that must be held in reserve: the reserve requirement ratio Since banks earn profit by lending at higher interest rates than they give on deposits, the reserve requirement is generally a binding limit.
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This note was uploaded on 09/13/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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Fractional_Reserve_Banking - Creating Money Through the...

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