Lecture8

# Ryan w herzog gu money march 17 2014 9 41 money

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Unformatted text preview: reation Money Creation - Bank Loans The bank will lend out the 90,000 of excess reserves Bank 1 Assets Reserves 10,000 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 Bank 1 Assets Reserves 100,000 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) Bank 1 Assets Liabilities Reserves 19,000 Deposits 190,000 Loans 171,000 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: Bank 1 Assets Reserves 100,000 Loans 900,000 Liabilities Deposits 1,000,000 1 Initial increase in reserve times reserves rate gives us the level of new 1 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 (3) 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 equity. 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? Bank 1 Assets Reserves \$20M Loans \$80M Securities \$10M Ryan W. Herzog (GU) Liabilities Deposits \$100M Bank Cap. \$10M Money March 17, 2014 16 / 41 Bank Management Deposit Outﬂows - Outﬂow Now suppose there is a 15 million zag outﬂow? Bank 1 Assets Liabilities Reserves \$5M Deposits \$85M Loans \$80M Bank Cap. \$10M Securities \$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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## This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.

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