Instructor15Commentary

Instructor15Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
INSTRUCTOR COMMENTARY Chapter Reference: Chapter 15 Money and the Banking System 1. Chapter 15 focuses on the following important concepts: A. Why financial institutions (like banks) accept deposits. Financial institutions (like banks) accept deposits because it is profitable for them to do so. Even though deposit-holding institutions have to incur substantial costs to provide for the security of deposited funds and to service the checking accounts of depositors, these institutions also have the use of these funds to make interest-bearing loans or to purchase other income-producing financial assets. The difference between the costs of accepting additional deposits and the interest earnings the institution receives from the funds profits additional profits. B. Why a given deposit constitutes both an asset and a liability. Deposit-holding institutions incur additional liabilities when they accept additional funds on deposit because they owe this money to their depositors. However, these same dollars are viewed by the deposit-holding institution as an asset, because they have the use of these funds (less the legal reserve requirement) to make interest-bearing loans or to purchase other income-producing financial assets. (text, pp. 375-376) C. The difference between required and excess reserves. Each new deposit creates additional liabilities and assets of the same amount. If a bank receives $1000 as an additional deposit (liability), its total reserves (assets) rise by an identical amount. However, not all of the reserves may be loaned out. The FED establishes a legal reserve requirement that determines what percentage cannot be loaned out (legally required reserves) and those that can (excess reserves). The FED can change the division of total reserves into their required and excess reserve components by changing the legal reserve requirement. (text, pp. 376-377) D. How the banking system creates and destroys deposits. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

Page1 / 12

Instructor15Commentary - 1 INSTRUCTOR COMMENTARY Chapter...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online