econ101fall11lecture15

econ101fall11lecture15 - Process of Money Creation and...

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Process of Money Creation and Destruction • Key Question: Can Banks “Create” Money?
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Assumptions • Legal Reserve Requirement Ratio = 10% • Banks hold No Excess Reserves • No Currency Drain
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Stage A • A parent gives John Doe $1000 in cash • John opens a checking deposit account at Bank A
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Bank A’s Balance Sheet Effects of the Deposit of Currency Bank A R + 1000 DD + 1000 • Important Note: Required Reserves = +$100 Excess Reserves = +$900
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What Can Bank A Do? • Reserves Earn Little or No Interest • Invest in Earning Assets Earn a Relatively High Return Types: Make Loans Purchase Securities • Bank A makes a Loan of $900 in cash to Mary Smith to purchase an auto
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Bank A R + 1000 - 900 + 100 DD + 1000 LN + 900 Important Note: • No Excess Reserves • “Fully Loaned Up” Bank A’s Balance Sheet Effects of the Loan
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Effects on Deposits and Money Bank A So far, how much in Deposits & Money has been created? 1000 1000 1000 0 Will the process stop? No! DD MC U D D  
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Stage B
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This note was uploaded on 01/12/2012 for the course ECON AS.180.101 taught by Professor Maccini during the Fall '08 term at Johns Hopkins.

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econ101fall11lecture15 - Process of Money Creation and...

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