Macro Chapter 13 Presentation 1

Fractional Reserve System US Banking System Only a portion (fraction) of checkable deposits need to be held as cash in the vaults or in the central bank

Required Reserves The amount of money that banks must hold in their vault or with the Fed at a given time Required Reserve Ratio= % of money banks must have in the vault or with the Fed

Reserve Ratio Reserve Ratio = Required Reserves Demand Deposit s

Reserve Ratio Cont’d. Ex- if the reserve ratio is 10% and a bank has $1,000,000, they need to have at minimum $100,000 in cash in the vault and/or Fed

Excess Reserves Excess Reserves = - Actual Reserves Required Reserves

Vault Cash The currency a bank has on its premises at a given time

Actual Reserves the funds that a bank has on deposit at the Federal Reserve Bank of its district plus vault cash

Balance Sheet (T-Account) Assets- includes required reserves (RR), Excess Reserves (ER), and loans Liabilities- includes deposits and loans from the Fed ***** Both sides must be equal**** AssetsLiabilities______ RR10Deposits100 ER10 Loans80 Total = 100Total= 100

Federal Funds Rate The interest rate banks pay on overnight loans to one another Banks often loan excess reserves to other banks for a small profit (currently 0.25%)

Discount Rate The interest rate that banks pay to borrow $$$ from the Federal Reserve

Money Creation Through Loans Banks can loan up to the amount of their excess reserves That money then is loaned to others causing a “money multiplier effect” When all excess is loaned out the bank is “loaned up”

Money Multiplier Cont’d. Maximum Checkable Deposit Creation = excess reserves x monetary multiplier Monetary Multiplier = 1 Required Reserve Ratio m = 1 R

The Banking System Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank I Bank J Bank K Bank L Bank M Bank N Other Banks Bank (1) Acquired Reserves and Deposits (2) Required Reserves (Reserve Ratio =.2) (3) Excess Reserves (1)-(2) (4) Amount Bank Can Lend; New Money Created = (3) $ $ $ $ $400.00

The Monetary Multiplier New Reserves $100 $20 Required Reserves $80 Excess Reserves $100 Initial Deposit $400 Bank System Lending Money Created Graphic Example