Ch 14

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ckable deposits −$100 Federal Reserve System Assets o  No net effects on monetary base. o  Reserves can be changed by random fluctua<ons. o  Monetary base is more stable. Liabili<es Liabili<es Currency in circula<on +$100 Reserves −$100 13 Making a Discount Loan to a Bank •  The Fed makes a $100 discount loan to a bank. Banking System Assets Reserves Federal Reserve System Liabili<es +$100 Discount loans +$100 Assets Discount loans Liabili<es +$100 Reserves +$100 •  Monetary liabili<es of the Fed increase by $100. •  Thus, monetary base also increases by $100. 14 Paying Off a Discount Loan •  The bank pays off the loan from the Fed. Banking System Assets Reserves Federal Reserve System Liabili<es −$100 Discount loans −$100 Assets Discount loans Liabili<es −$100 Reserves •  Monetary liabili<es of the Fed decrease by $100, so does monetary base. •  Monetary base changes one- for- one with a change in the borrowings from the Federal Reserve System. −$100 15 Deposit Crea<on: Single Bank •  Suppose Chase bank has sold $100 bond to the Fed. •  Excess reserves increase by $100 since no changes in deposits. •  Make a loan and put the money into a checking account. •  The borrower will use the money. •  The open market opera<on created excess reserves, which were in turn converted to loans. Chase Bank Assets Liabili<es Securi<es −$100 Reserves +$100 Chase Bank Assets Securi<es Liabili<es Reserves −$100 Checkable +$100 deposits Loans +$100 +$100 Chase Bank Assets Liabili<es Securi<es −$100 Loans +$100 16 Deposit Crea<on: The Banking System •  Suppose that the $100 of deposits created by Chase bank’s loan is deposited at Bank A that does not have excess reserves. •  With the 10% required reserve ra<o, Bank A will make loans of $90. Bank A Bank A Assets Reserves Liabili<es +$100 Checkable deposits +$100 Assets Reserves Loans Liabili<es +$10 Checkable +$90 deposits +$100 •  The borrower will spend the $90 and it will be deposited at another bank, say Bank B. 17 Deposit Crea<on: The Banking System •  Checkable deposits at Bank B increase by $90. •  In the banking system as a whole, the checkable deposits increase by $190 ($100 at Bank A + $90 at Bank B). Bank B Assets Reserves Bank...
View Full Document

This note was uploaded on 02/02/2013 for the course ECON 2035 taught by Professor Stahl during the Fall '08 term at LSU.

Ask a homework question - tutors are online