Mr. Nunn Money Creation Process. Total reserves The sum of a bank’s deposits in its reserves account at the Fed and its vault cash. Total Reserves= Deposits.

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Presentation transcript:

Mr. Nunn Money Creation Process

Total reserves The sum of a bank’s deposits in its reserves account at the Fed and its vault cash. Total Reserves= Deposits in the reserve account at the Fed + vault cash.

Banks Reserves Broken Down Required Reserve The minimum account of reserves a bank must hold against its deposits as mandated by the Fed. Reserve requirements- the regulation that requires a bank to keep a certain percentage of it deposits in it reserve accounts with the Fed or in their vault. Required reserves= reserve requirement X checking account deposits.

Banks Reserves Broken Down Excess Reserve Any reserves held beyond the required amount. Loans are made by banks using their excess reserves. Excess reserves= total reserves – required reserves.

What happens after a loan is granted? Jenny gets a loan for $1000 from bank A to buy a computer. Jenny buys the $1000 computer from a computer store. The storeowner’s deposit the money in bank B. Bank B now got a $1000 increase in it account. Bank B has to put some of the money in reserve, let say 10%. Leaving $900 for bank B to loan to someone. This process repeats until the money become to little to loan.

Your turn! Jenny gets a loan for $900 from bank A to buy a TV. Jenny buys the $900 TV from a electronics store. The storeowner’s deposit the money in bank B. Bank B now got a $900 increase in it account. Bank B has to put some of the money in reserve, let say 10%. How much can bank B loan out?

Change in money supply Change in the money supply = 1/Reserve Requirement x Change in reserves of the first bank.

Change in money supply Change in the money supply = 1/Reserve Requirement x Change in reserves of the first bank. The Reserve Requirement is 10%. The change in reserves is a $1000. So what is money supply?

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