macro economics chapter10.pptVIP

Chapter 10How banks create money Learning objectives Describe the simplified balance sheets of a single bank and the banking system Explain the money-creating abilities of a single bank that is part of a multibank system Explain the money-creating abilities of the banking system as a whole through multiple-deposit expansion, and compare this with the money-creating abilities of the single bank Learning objectives (cont.) Define the monetary (or credit) multiplier Discuss some of the limitations on the banking system’s ability to create deposits and expand the money supply Describe how the banks’ lending activities may contribute to financial instability and to increased fluctuations in the level of economic activity Balance sheet A statement of assets and claims that summarises the financial position of a firm at a point in time Each side balances: Assets are items of economic and financial value Assets = Liabilities + Net worth Formation of a bank Transaction (1): The birth of a bank New owners sell $250 000 worth of shares in the bank Formation of a bank (cont.) Transaction (2): Becoming a going concern Acquisition of property and equipment Formation of a bank (cont.) Transaction (3): Accepting deposits Citizens and businesses deposit $100 000 Change in composition not total supply of money Formation of a bank (cont.) Required reserve ratio The ratio of reserves to deposits to meet official liquidity requirements Transaction (4): Setting aside required reserves Assume reserve ratio is 20% Bank must keep $20 000 (required reserves) Formation of a bank (cont.) Bank decides to keep $110 000 (actual reserves), which is $90 000 more than required (excess reserves) Bank’s required reserves are 20% of $100 000 Formation of a bank (cont.) Transaction (5): Drawing a cheque A citizen who has substantial deposits in the bank draws a cheque for $50 000 to buy goods The seller of the goods deposits the cheque in another bank The banking system as a whole has not lo