Banking - Fractional Reserve Banking and Money Creation...

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Fractional Reserve Banking and Money Creation
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Accounting structure Assets: Things that bring value; things owned Liabilities: Things owed to others; things that drain value Accounting identity: Net worth = Assets – Liabilities T- account or balance sheet: format used to display net worth
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Typical bank balance sheet Assets Liabilities Cash Reserves: $30 million Capital accounts: $32 million Loans: $270 million Checkable deposits: $213 million US Government securities: $50 million Time deposits: $210 million Other securities: $80 million Other liabilities: $50 million Other assets: $75 million Total Assets: $505 million Total liabilities: $505 million
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Simplified balance sheets To understand how banks create money, we will use simplified balance sheets. The only liabilities are checkable deposits, and the only assets are reserves and loans. We’ll examine how a new deposit works, assuming a 20% reserve
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Full Reserve Banking Assets Liabilities Reserves: $100,000 Checkable Deposits: $100,000 United Bank Gandalf opens a new checking account, depositing $100,00
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Full Reserve Banking In this case, the bank has created demand deposits to just equal the cash reserve on hand. The public has put $100,000 in the bank, and received $100,000 in checkable deposits, i.e., checking accounts, in return. There has been NO CHANGE in M1 at this point, since currency in the hands of the public has fallen by $100,000, and checkable deposits have risen by
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Fractional Reserve Banking Suppose the United Bank decides to keep only enough cash reserves to cover only 20% of its deposits. Then, it will loan out $80,000, and its balance sheet will look like the following: Assets Liabilities Required Reserves: $20,000 Checkable Deposits: Excess Reserves: $80,000 Original: $100,000 Loans: $80,000 For loan accounts: $80,000 Total Assets:  $180,000 Total Liabilities:  $180,000 United Bank
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This note was uploaded on 04/27/2011 for the course ECON 110 taught by Professor Dont during the Spring '11 term at Griggs.

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Banking - Fractional Reserve Banking and Money Creation...

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