Reserve Banking and T-Accounts

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Presentation transcript:

Reserve Banking and T-Accounts Open Market Operations define $10,000 $10,000 Must balance

Reserve Banking and T-Accounts Reserves $10,000 Deposits $10,000 * Each deposit reduces currency and increases Demand Deposits by same amount *If there is 100% Reserve Banking – then the banking system has no effect on the money supply… - Explain

* Assume the flow of deposits = flow of withdraws R R $2000 Deposits $10,000 Loans $8000 or Excess Reserves ----- * Assume the flow of deposits = flow of withdraws

*careful * What did the Fed do? Bought a bond from you = $10,000 Set the RR which allowed the bank to loan out $8000 …..so the Fed created $18,000 What is the Money Supply now? $18,000 *Created more money and liquidity but not wealth

…or “the money supply is currently $18,000, but it could become…..? 1 / R = 1 / 1/5 or 1/ .20 = 5 *careful- b/c even if RR is 20%...banks could choose to hold more in Excess Reserves which would change the MM…..see #2 g …or “the money supply is currently $18,000, but it could become…..? Money Multiplier x Deposits (or Total Assets) 5 x $10,000 = $50,000

Less…… Smaller amount of each loan gets re-deposited to be loaned out again * The larger the reserve requirement = the smaller the money multiplier …..Explain

Less…… Smaller amount of each deposit gets loaned out to be deposited again

$1000 in currency Assets Liabilities R $0 Deposits $0

$1000 Assets Liabilities RR $1000 Deposits $1000

Assets Liabilities RR $200 Deposits $1000 L $800 MM x Deposits 5 x $1000 = $5000

Assets Liabilities RR $200 Deposits $1000 L $800 Original $1000 already existed…..the Fed created the RR which created the MM of 5….so MS could become $5000…….so Fed is responsible for $4000 **compare to #1 d

Assets Liabilities RR $100 Deposits $1000 L $900 MM = 10 so MS could become …$10,000

In c - the RR was 20% so MM = 5 …so MS = $5000 In e – the RR was 10% so MM = 10 …so MS = $10,000 Larger the RR = smaller MM = less growth potential in MS

Assets Liabilities RR $100 Deposits $1000 ER $100 L $800 Even if RR is 10% but banks choose to hold more ….here they are acting as if RR were 20%.....so MM is really 5 instead of 10….so MS could only grow to $5,000

In c – RR = 20% so MM = 5 so MS becomes $5000 In g – RR = 10% , but bank holds extra 10% - so acting like RR 20% …so MM = 5 so MS becomes $5000 *Consider what the Fed can and can not control (text p. 621)