Banking - Banking Bank Deposits and Money Creation U.S...

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Banking
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Bank Deposits and Money Creation U.S. banks do not print or issue money anymore. But demand deposits are part of the money supply, so banks play an important role in how money is “created.” To understand modern banking, let’s start with a short history of banking….
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Goldsmiths as Bankers In Medieval Europe, people would store their gold coins with the local goldsmith, who had a safe. Goldsmith gave them receipts for a certain amount of gold. Gradually, the receipts began to circulate as paper money.
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Goldsmiths realized that everyone did not come for their gold at the same time. They began to lend out gold coins from the safe. Next, they began to lend out receipts for gold. Banking system created when the number of receipts was greater than coins in safe.
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Reserve Ratio Money created through loans. More receipts were circulating than gold in safes. To be reliable, bank (or goldsmith) had to keep enough gold coins for anyone who came to cash in their receipts. Reserve ratio: Number of coins in safe Number of receipts in circulation Reserves in vault Demand deposits =
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Calculating Reserve Ratio A. What is the goldsmith’s reserve ratio when there are 1,000 receipts in circulation and 1,000 coins the safe? Answer: 100%
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Calculating Reserve Ratio #2 Try calculating the reserve ratio for B and C. Answers: 50% and 25%
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A bank is a financial institution that accepts deposits, makes loans, and offers checking accounts. Like the goldsmiths, banks lend out some of their deposits and keep some as reserves: They pay interest to their depositors. They charge higher interest rates to their
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Banking - Banking Bank Deposits and Money Creation U.S...

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