TRANSACTIONS DEMAND FOR MONEY and

TRANSACTIONS DEMAND FOR MONEY and - TRANSACTIONS DEMAND FOR...

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TRANSACTIONS DEMAND FOR MONEY and SPECULATIVE DEMAND FOR MONEY We will not spend time talking about bond price calculations. However, it is important to note that as interest rates increase, bond prices fall. PART TWO – Understanding the money multiplier In order to understand the money multiplier and how banks create money we must first understand the balance sheet facing banks (and all individuals and firms). A bank will keep what it owns (assets) on the right side of the balance sheet and what it owes (liabilities) along with owner’s equity on the left side of the balance sheet. Let’s identify what side of the balance sheet we would put things for banks. 1. Customer’s checking deposits (demand deposits) 2. Loans to customers 3. Cash on hand 4. U.S. Government securities (Bonds) the bank owns. Let’s suppose the RESERVE REQUIREMENT is 10% that means out of all demand deposits in Bank A they must hold 10% back in case customers want to take their money out of the bank. If there was not a fractional reserve system the banking system could not “create” money.
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