Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. CHAPTER 7 Pulling Rabbits from Hats: Financial Intermediaries and Money Creation

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-1 Direct and Indirect Finance

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-2 Accounting Tautology 1

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-3 Accounting Tautology 2

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-4 Sources and Uses of Bank Funds

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-5 Typical Bank’s Balance Sheet

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-6 The Check-Clearing Process through the Central Bank

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-7 Effect of the Cleared Check on the M 2 Money Supply

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-8 International Check Clearing

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-9 First National Bank’s Initial Balance Sheet: How Much Can it Lend?

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-10 Required Reserve Ratio

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-11 Total Reserves, Required Reserves, and Excess Reserves

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-12 $300 Million Loan to Adam Atwood Who Pays Bart Brewster

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-13 Effect on M 2 of a $300 Million Cash Loan

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-14 Changes in First National’s Balance Sheet due to a Cash Loan

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-15 First National Bank’s Balance Sheet after the Cash Loan

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-16 First National’s Excess Reserves after the Cash Loan

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-17 Balance Sheet Changes for Loans Made with Checking Accounts

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-18 Bart Brewster Deposits Check in Second National Bank

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-19 Check Clears from Second National Bank to First National Bank

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-20 Summary of Changes in First National Bank’s Balance Sheet

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-21 Calculation of First National Bank’s Excess Reserves after the Loan Is Made, Funds Are Spent, and Check Is Cleared

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-22 Effect on M 2 of a $300 Loan Paid in Checking Account Form

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-23 Effect of Brewster’s Deposit on Second National Bank

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-24 Second National’s Excess Reserves after Brewster’s Deposit

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-25 Changes in Third National’s Balance Sheet after Durrant’s Deposit

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-26 Third National’s Excess Reserves after Durrant’s Deposit

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-27 Lend-Spend-and-Redeposit Cycle

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-28 Checking-Deposit Multiplier: Power of the Banking System to Create Money

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-29 U.S. Checking-Deposit Multiplier, 1990–2006 Source: Data from Federal Reserve Bank of St. Louis, Economic Data—FRED II, fred2/ (accessed September 8, 2006).

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-30 Effects on the Checking-Deposit Multiplier when 100% of a Loan Is Held as Currency in Circulation

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-31 Effects on the Checking-Deposit Multiplier when 100% of a Loan Is Held as Currency in Circulation

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-32 Effects of Customary Reserves on the Checking-Deposit Multiplier

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-33 Effects on the Checking-Deposit Multiplier of Redeposits in Near-Money Accounts

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-34 Effect of Near-Money Deposits on the Checking-Deposit Multiplier

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-35 Two Ways to Define the M 1 Money Supply

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-36 M 1, the Monetary Base, and the Checking-Deposit Multiplier

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-37 Two Ways to Define the M 2 Money Supply

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-38 M 2, the Monetary Base, and the Checking-Deposit-and Near-Money-Deposit Multiplier

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-39 Factors Affecting the M 1 and M 2 Money Multipliers

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 7-40 U.S. M 2 Money Multiplier, 1990–2006 Source: Data from Federal Reserve Bank of St. Louis, Economic Data—FRED II, fred2/ (accessed September 9, 2006).

Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Economic Information for Switzerland, 2001–2005