Copyright 2008 The McGraw-Hill Companies 13-1 The Fractional Reserve System Money Creation Monetary Multiplier Last Word Key Terms End Show 13 Money Creation.

Slides:



Advertisements
Similar presentations
Money Creation Chapter 32 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Advertisements

M1: The Narrowest Definition of the Money Supply: Means of Payment How Is Money Measured in the United States Today? Measuring the Money Supply, May 2007.
Test Your Knowledge Fractional Reserve Banking Click on the letter choices to test your understanding ABC.
15 Money Creation This chapter explains how the banking system creates money and increases the money supply. The balance sheets of the banks are used.
Multiple Deposit Expansion
The Determinants of the Money Supply
Macroeconomics, Maclachlan Nov. 10, Principles & Policies I: Macroeconomics Chapter 11: Money, Banking, and the Financial Sector.
Chapter 18 Bank Reserves and the Money Supply. Key Ideas  Process of check clearing and its impact on the balance sheets of:  Commercial banks  Federal.
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.
Chapter: ©2009  Worth Publishers >> Krugman/Wells Money, Banking, and the Federal Reserve System 14 CHECK YOUR UNDERSTANDING.
Tools of Monetary Policy Copyright 2014 Diane S. Docking1.
RESERVE REQUIREMENT With Kate Eskra. OBJECTIVES: What will you learn? We can classify money according to how liquid it is (M0, M1, M2). The FOMC is the.
Principles of Macroeconomics Supplement to Chapter 9 How Banks Create Money.
Financial Sector: Banking and Money Creation
AP Econ Week#11 Fall Economics 11/10/14 OBJECTIVE: Examine the Role of the Federal Reserve. APMacro-I.B Language objective:
CHAPTER 32 Creation of Money Two Definitions of the Money Supply, January 2005 M1 = $1361 billion Currency Outside banks $710 billion Other checkable.
CHAPTER 32 Creation of Money Two Definitions of the Money Supply, January 2005 M1 = $1361 billion Currency Outside banks $710 billion Other checkable.
Chapter 15. Money Supply Process
Deposit Expansion and Multiplier
Chapter 15 Money Creation.
1 Lecture 26: Multiple deposit creation Mishkin Ch 13 – part B page
Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan CHAPTER 22 MONETARY POLICY AND THE FEDERAL.
Banking and Money Creation. What Banks Do Banks use liquid assets to finance illiquid investments Liquid assets must be available to meet depositors’
1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern CHAPTER Banking and the Money Supply Macro.
Bell Ringer See “Money Creation” Video. Money Creation Chapter 33.
ทฤษฎีและนโยบาย การเงิน Monetary Theory and Policy Money Supply Process Reference: Money, the Financial System, and the Economy ( R. Glenn Hubbard )
Money Creation 15 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Multiple Deposit Expansion AP Economics Coach Knight.
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 17 The Central Bank Balance Sheet and the Money Supply.
How Banks and Thrifts Create Money Most transactions are “created” as a result of loans from banks or thrifts. Chapter demonstrates the money- creating.
Multiple Deposit Creation and the Money Supply Process
How Banks & Thrifts Create Money Chapter 14. Introduction ► Most transaction accounts are created as a result of loans from banks or thrifts ► This chapter.
McGraw-Hill/Irwin Copyright  2006 by The McGraw-Hill Companies, Inc. All rights reserved. MONEY, BANKING, AND THE FINANCIAL SECTOR MONEY, BANKING, AND.
Copyright McGraw-Hill/Irwin, 2005 Balance Sheet of a Commercial Bank Formation of a Commercial Bank Multiple Deposit Expansion Process The Monetary.
Money Creation Chapter 15 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent.
Chapter 32 How Banks and Thrifts Create Money The Balance Sheet of a Commercial Bank Balance sheet = a statement of assets and claims on assets that.
5-1 Lecture 5 Multiple Deposit Creation and the Money Supply Chapter 15 pages and Chapter 16 pages
Mr. Mayer AP Macroeconomics Multiple Deposit Expansion.
Monetary Policy Control of money supply (M) and interest rates (i)
Money Creation Chapter 33 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent.
McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Money Creation 35.
Copyright 2011The McGraw-Hill Companies 13-1 The Fractional Reserve System Creating a Bank Money Creation The Banking System Monetary Multiplier Last Word.
1 Money Creation ©2006 South-Western College Publishing.
Money Creation Chapter 32.
The Fractional Reserve Banking System: How Banks Create Money YOUR MONEY IS NOT AT THE BANK (AT LEAST NOT ALL OF IT)
Multiple Deposit Creation: A Simple Model
Chapter 20 The Instruments of Central Banking. Copyright © 2004 Pearson Addison-Wesley. All rights reserved KEY WORDS AND CONCEPTS BANK RESERVES.
How Banks Create Money Please listen to the audio as you work through the slides.
Fractional Reserve Banking When banks hold only a small portion of deposits to cover potential withdrawals and then loans the rest of the money out. If.
AP MACROECONOMICS Multiple Deposit Expansion – Module 25.
ECONOMICS Paul Krugman | Robin Wells with Margaret Ray and David Anderson SECOND EDITION in MODULES.
CHAPTER 10: SECTION 4 The Money Creation Process Different Types of Reserves Banks have three types of reserves: total, required, and excess. (See Transparency.
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Money and Banking Lecture 34.
How Banks and Thrifts Create Money 14 C H A P T E R.
1 Objective – Students will be able to answer questions regarding how banks and thrifts create money. SECTION 1 Chapter 13, 14- Multiple Deposit Expansion.
Money Creation Chapter 32.
Please listen to the audio as you work through the slides
Chapter 25 Money Creation
Chapter 32 Money Creation McGraw-Hill/Irwin
Banking and Money Creation
How Banks and Thrifts Create Money
32 Money Creation This chapter explains how the banking system creates money and increases the money supply. The balance sheets of the banks are used.
Chapter 15 Money Creation McGraw-Hill/Irwin
©2005 South-Western College Publishing
Chapter 32 Money Creation McGraw-Hill/Irwin
How Banks and Thrifts Create Money
32 Money Creation Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
Module 25 Banking and Money Creation KRUGMAN'S MACROECONOMICS for AP*
Presentation transcript:

Copyright 2008 The McGraw-Hill Companies 13-1 The Fractional Reserve System Money Creation Monetary Multiplier Last Word Key Terms End Show 13 Money Creation “The process by which banks create money is so simple that the mind is repelled.” John Kenneth Galbraith My favorite economist

Chapter Objectives Why the U.S. Banking System is Called a “Fractional Reserve” System Distinction Between a Bank’s Actual Reserves and Its Required Reserves How a Bank Can Create Money Through Granting Loans The Multiple Expansion of Loans and Money by the Entire Banking System The Monetary Multiplier and How to Calculate it

Creating Money Fractional Reserve Banking System –Only part (a fraction) of checkable deposits are backed up by cash in bank vaults or in bank’s accounts at the Fed. –Size of the “fraction” held in reserves is regulated by Fed. Characteristics of a Fractional Reserve System –Banks Create Money Through Lending –Fractional Reserve Banks are Subject to “Panics” or “Runs”

How banks create money (increase money supply)  Banks are required to keep a certain percentage of checking account balances on hand in their vault or in their account at the Federal Reserve Bank.  The reserve requirement is a percentage established by the Federal Reserve. Creating Money

How banks create money (increase money supply)  For example, if the reserve requirement is 10%, and Wachovia Bank has $10 million deposited into checking accounts at their banks, Wachovia must always have at least $1 million ($10 million x 10%) on hand in vault cash or in their cash account at the Fed.  Banks can then make loans to consumers and businesses with the other 90% of their checking deposits, thereby creating money in the money supply. Creating Money

Excess Reserves = Loanable Funds Excess Reserves Amount that banks can loan out. What banks have in vaults and accounts at Fed. - Actual Reserves - = Required Reserves What banks are required to have in vaults and Fed accounts. =

How banks create money (increase money supply) Assume a 10% reserve requirement, banks loan all excess reserves (“loaned up”), and borrowers deposit entire amount back into a bank (no leakages). New Deposits Required Reserves (10%) Loanable Funds $ 100,000 $ 10,000$ 90,000 90,0009,00081,000 8,10072,900 7,29065,610 6,56159,049 5,90553,145 $1,000,000$100,000$900,000 Injection into the money supply by the Federal Reserve Bank (we’ll discuss this in Ch 14). Final impact on money supply

How banks create money (increase money supply) With fractional reserve banking, the initial injection into the banking system has a multiplier effect on the money supply. Amount of the impact depends on the reserve requirement. Money (deposit) multiplier = reciprocal of reserve requirement If reserve requirement is 10%, money multiplier = 1/.10 = 10. Deposit of $100,000 can impact the money supply by 10 x $100,000 = $1 million. In order to increase the impact a deposit would have on the money supply, would we raise or lower the reserve requirement? If reserve requirement is 5%, money multiplier = 1/.05 = 20. Deposit of $100,000 can impact the money supply by 20 x $100,000 = $2 million.

The Monetary Multiplier Monetary Multiplier or Checkable- Deposit Multiplier Monetary Multiplier = 1 Required Reserve Ratio (20%) m = 1 R New Reserves $100 $20 Required Reserves $80 Excess Reserves $100 Initial Deposit $400 Bank System Lending Money Created Graphic Example = 5

The Monetary Multiplier Reversibility –Making Loans Creates Money –Loan Repayment Destroys Money

Bank Panics of Series of Bank Panics Before Deposit Insurance (FDIC) Mass Withdrawals From Fear –More than 9,000 banks failed in one year Move to Cash Reduced Money Supply Through Reduction in Loans (money destruction) Multiple Contraction Slowed Lending and the Economy 1933 National Bank Holiday for One Week Resulted in FDIC and 25% Drop in Money Supply Contributed to the Great Depression Regulation Protects the System Today (your author said this, not me!) Last Word

Key Terms fractional reserve banking systemfractional reserve banking system vault cash required reserves reserve ratio excess reserves actual reserves monetary multiplier