Instructor15Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

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INSTRUCTOR COMMENTARY Chapter Reference: Chapter 15Money and the Banking System 1. Chapter 15 focuses on the following important concepts:A. Why financial institutions (like banks) accept deposits.
B. Why a given deposit constitutes both an asset and a liability.
D. How the banking system creates and destroys deposits. 1
The banking system (including all deposit-holding institutions) creates money by lending out their excess reserves. The new loans, when spent, lead to new checkable deposits in other banks, which in turn lead to additional excess reserves, new loans, and yet additional new deposits. The maximum money creating ability of the entire banking system is determined by the product of the money multiplier and the amount of excess reserves. Deposits are destroyed by the banking system when there is a shortage of required reserves. Banks must meet their legal reserve requirements at the end of each business day. If they are unable to meet their legal reserve requirements they sell off a portion of their assets (e.g., government bonds), which leads to loses of checkable deposits and reserves in other banks. The maximum amount of money that the banking system must destroy is given by the product of the money multiplier and the initial shortage of required reserves. (text, pp. 377-382)E. The money multiplier. The maximum value of the money multiplier is calculated as the reciprocal of the legal reserve requirement. In order for the

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