principles of macroeconomics supplement to chapter 9
DESCRIPTION
Principles of Macroeconomics Supplement to Chapter 9. How Banks Create Money. TRANSACTION 1 Creating a bank $250,000 Cash for Capital Stock. FORMATION OF A COMMERCIAL BANK. LIABILITIES AND NET WORTH. ASSETS. FORMATION OF A COMMERCIAL BANK. LIABILITIES AND NET WORTH. ASSETS. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/1.jpg)
Principles of Macroeconomics Supplement to Chapter 9
How Banks Create Money
![Page 2: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/2.jpg)
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 1
Creating a bank$250,000 Cash
forCapital Stock
![Page 3: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/3.jpg)
Cash $250,000 Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Deposit Added to Vault Cash
![Page 4: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/4.jpg)
Cash $250,000 Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 2
Acquiring Property and
Equipment$240,000 Cash
![Page 5: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/5.jpg)
Cash $ 10,000Property 240,000
Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
![Page 6: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/6.jpg)
Cash $ 10,000Property 240,000
Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 3
AcceptingDeposits
$100,000 Cash
![Page 7: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/7.jpg)
Cash $110,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
![Page 8: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/8.jpg)
Cash $110,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
NOTES:Bank deposits aresubject to a reserverequirement.
Reserveratio
Commercial bank’srequired reserves
Commercial bank’scheckable-depositliabilities
=
![Page 9: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/9.jpg)
Cash $110,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Three Important Issues...
1 - Excess Reserves = Actual Reserves - Required Reserves
(assume 20% reserve requirement) $110,000 - 20,000 = $90,0002 – Control of Lending Ability3 - Asset or Liability to Which Bank?
![Page 10: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/10.jpg)
Cash $110,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 4
Depositsat the FED
$110,000 Cash
![Page 11: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/11.jpg)
Cash $ 0Reserves 110,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
![Page 12: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/12.jpg)
Cash $ 0Reserves 110,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 5
A check is drawn against the bank
$50,000
![Page 13: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/13.jpg)
Cash $ 0Reserves 60,000Property 240,000
Checkable Deposits $ 50,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
![Page 14: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/14.jpg)
Cash $ 0Reserves 60,000Property 240,000
Checkable Deposits $ 50,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
NOTES:Banks create moneyby lending excessreserves and destroyit by loan repayment.Purchasing bondsfrom the public alsocreates money.
![Page 15: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/15.jpg)
Reserves $ 60,000Property 240,000
Checkable Deposits $ 50,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 6
Make a loan from excess reserves
$50,000
![Page 16: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/16.jpg)
Reserves $ 60,000Loans 50,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Making the loancreated money!
![Page 17: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/17.jpg)
Reserves $ 10,000Loans 50,000Property 240,000
Checkable Deposits $ 50,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
After a check for the $50,000is drawn against the bank
![Page 18: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/18.jpg)
Reserves $ 10,000Loans 50,000Property 240,000
Checkable Deposits $ 50,000Capital Stock 250,000
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 7
Repaying a loan with cash$50,000
FORMATION OF ACOMMERCIAL BANK
![Page 19: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/19.jpg)
Reserves $ 10,000Loans 0Property 240,000
Checkable Deposits $ 0Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
$50,000 in money supplyis destroyed!
![Page 20: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/20.jpg)
Reserves $ 60,000Securities 50,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 8
(Assume previous balance sheet)
Buy GovernmentSecurities$50,000
![Page 21: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/21.jpg)
Reserves $ 60,000Securities 50,000Property 240,000
Checkable Deposits $100,000Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Bankers pursue two conflicting goals:Profits and Liquidity
Use of Federal Funds MarketFederal Funds Rate
![Page 22: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/22.jpg)
MULTIPLE DEPOSIT EXPANSION PROCESS
BankAcquired reserves
and depositsRequiredreserves
Excessreserves
Amount bankcan lend - Newmoney created
ABCDEFGHIJKLMNOther banks
$100.00 80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 21.99
$20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40
$80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59
$80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59
$400.00Total amount of money created by the banking system
![Page 23: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/23.jpg)
MULTIPLE DEPOSIT EXPANSION PROCESS
BankAcquired reserves
and depositsRequiredreserves
Excessreserves
Amount bankcan lend - Newmoney created
ABCDEFGHIJKLMNOther banks
$100.00 80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 21.99
$20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40
$80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59
$80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59
$400.00Total amount of money created by the banking system
Moneydestruction worksin exactly the same
multiple way!
![Page 24: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/24.jpg)
Maximumcheckable-
depositcreation
= Excessreserves x Deposit
Multiplier
DepositMultiplier Required reserve ratio
1=
THE DEPOSIT MULTIPLIER
![Page 25: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/25.jpg)
$20Requiredreserves
$100New reserves
$100Initial
Deposit
$400Bank system lending
Money Created
$80Excess
reserves
OUTCOME OF MONEY EXPANSION
![Page 26: Principles of Macroeconomics Supplement to Chapter 9](https://reader035.vdocuments.site/reader035/viewer/2022062315/5681624a550346895dd28df8/html5/thumbnails/26.jpg)
$20Requiredreserves
$100New reserves
$100Initial
Deposit
$400Bank system lending
Money Created
$80Excess
reserves
OUTCOME OF MONEY EXPANSION
Leakages exist...
Currency Drains Excess Reserves