Banking3 - be held back in reserves and the rest may be...

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Banking Creation of money This action by banks can also be illustrated using a balance sheet procedure. A balance sheet is an accounting tool that lists assets and liabilities. For a bank, reserves and loans serve as assets because they are money that the bank has, or has coming. Deposits, on the other hand, are liabilities; they are money that the bank owes. When creating a balance sheet, the assets are listed on the left and the liabilities are listed on the right. Figure %: Balance Sheet for a Bank We can model the example of fractional reserve banking presented above using a balance sheet procedure. This is done in figure 1. To begin, list the assets and the liabilities of the bank after $1000 is deposited and $500 is loaned out. Remember that the reserve rate is 50%, so $500 must
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Unformatted text preview: be held back in reserves and the rest may be loaned out. Given that this money is deposited into the bank again rather than stored in a mattress, the liability of deposits increases by $500 to $1500 while the reserves increase by $250 to $750. The bank now has $250 with which to make loans. Given that it loans out the entire amount, which is then deposited again, the liability of deposits increases by $250 to $1750. Furthermore, the assets of loans increase to $750 and the assets of reserves increase to $875. This process continues until the reserve amount is equal to the total amount of the money supply. Until that time, each loan that is made and redeposited increases the money supply....
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