Unformatted text preview: use the rest to make loans-Venezuela requires its banks to hold on to 84% of its deposits with respect to loans, the US only has a 10% reserve requirement o Fractional reserve system – two subsets 1) Assume no banking system money supply = currency + deposits = 100 2) Assume 100% reserves currency = 0, deposits = 100, so money supply is still 100 3) Fractional reserve banking system a) Individuals and firms do not hold a lot of money, THE BANKS hold the majority a. Suppose rr = 10%, so FNB loans all but 10% b. Deposits = 100, currency = 90, so money supply = 190 (!!!!) i. If we go through this process over and over again, we see that the total money supply = $1,000 (from a mere 100) ii. Money multiplier = initial deposit / rr but this is not an accurate way of describing it, since people may hold on to some of their money b) Households and firms are allowed to hold on to cash...
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- Fall '08
- Macroeconomics, Fractional-reserve banking, fractional reserve