Download
banks and the creation of money n.
Skip this Video
Loading SlideShow in 5 Seconds..
Banks and the Creation of Money PowerPoint Presentation
Download Presentation
Banks and the Creation of Money

Banks and the Creation of Money

125 Views Download Presentation
Download Presentation

Banks and the Creation of Money

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. Banks and the Creation of Money • Financial Intermediary: Go between borrowers and lenders. • Take deposits and give out loans. • But can banks create money??? • People deposit $$$ into banks. • Reserve Ratio: the % of deposits held in reserve • The Required Reserve Ratio, or 'RR', is a percentage of that $$$ that banks must keep. • Any part of the deposit that banks hold above the required reserves is called excess reserves. • Fractional Reserve Banking • The banks may loan out excess reserves or buy government securities (bonds.) • When a bank makes a loan, it creates a checkable deposit for the borrower to be re-deposited in another bank, increasing the money supply! 

  2. Money Multiplier The money multiplier measures the potential amount the money supply can increase when new deposits enter the system. Money Multiplier = 1/Reserve Requirement (RR) Expansion of the Money Supply = Excess Reserves x Multiplier. Example: a deposit of $100 with the RR as 10%, the money supply will increase by $________________. $900? M1 increased to $1,000. Total increase in Money Supply may be less than predicted by money multiplier if: • Borrowers do not spend all they borrow • Banks do not lend out all excess reserves • People hold part of their money as cash