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Unformatted text preview: reation Money Creation - Bank Loans The bank will lend out the 90,000 of excess reserves
Loans 90,000 Liabilities
Deposits 100,000 The loan will initially be held as cash before it is redeposited. Ryan W. Herzog (GU) Money March 17, 2014 10 / 41 Money Creation Money Creation - Redeposit Now suppose the loan of 90,000 gets redeposited
Loans 90,000 Liabilities
Deposits 190,000 Both deposits and reserves increase by the amount of the loan. Ryan W. Herzog (GU) Money March 17, 2014 11 / 41 Money Creation Money Creation - New Loan The bank has 81,000 in excess reserves (100, 000 − 190, 000 × 0.1)
Reserves 19,000 Deposits 190,000
The excess reserves will be relent and held as cash. Ryan W. Herzog (GU) Money March 17, 2014 12 / 41 Money Creation Money Creation - Final Stage Every loan will be eventually redeposited until:
Loans 900,000 Liabilities
Deposits 1,000,000 1
Initial increase in reserve times reserves rate gives us the level of new
deposits: 100, 000 × 0.1 = 1, 000, 000. Ryan W. Herzog (GU) Money March 17, 2014 13 / 41 Money Creation Money Creation Process
Banks will make loans with excess reserves.
The initial deposit of 100,000 zags (initially 100,000 in reserves)
eventually created deposits that totalled 1,000,000 or
Bank Deposits = Bank Reserves
Required Reserve Ratio (1) We assumed the public has chosen to hold no cash and banks do not
hold excess reserves. If the public holds cash then:
Money Supply = Currency held by public + Bank Deposit (2) or
Money Supply = Currency held by public + Ryan W. Herzog (GU) Money Bank Reserves
Required Reserve Ratio
March 17, 2014 14 / 41 Bank Management Bank Capital Bank capital is the diﬀerence between assets and liabilities.
It is essentially money provided by the owners. It is also called owners
Bank capital is needed to insure banks don’t fail.
When liabilities exceed assets the bank becomes insolvent, fails. Ryan W. Herzog (GU) Money March 17, 2014 15 / 41 Bank Management Deposit Outﬂows - Initial Balance Sheet What happens when there is a large deposit outﬂow?
Securities $10M Ryan W. Herzog (GU) Liabilities
Bank Cap. $10M Money March 17, 2014 16 / 41 Bank Management Deposit Outﬂows - Outﬂow Now suppose there is a 15 million zag outﬂow?
Bank Cap. $10M
Notice the bank is short reserves. The need to have 8.5 million. They
must sell securities or call in loans. Ryan W. Herzog (GU) Money March 17, 201...
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- Spring '09