How Banks CreateHow Banks Create MoneyMoney [[MSMS]]MSMS = = CurrencyCurrency + + DDDD of of PublicPublic

Banks Banks [thru loans][thru loans] C Create reate MMore ore DDDD

Give me a loan so there will be more DD in the system.

1. Fractional Reserve Banking SystemFractional Reserve Banking System – a fraction of DD are kept in reserve(say, 10%) at either the bank’s vault or at the Fed.

2. Vault cashVault cash – cash held by a bank (banks rarely keep more than 2%2% of their in cash)

3. Required Reserve(RR)Required Reserve(RR) –specified percentage of DD that banks must keep as RR.

4. Excess reservesExcess reserves – total reserves(TR) – RR. ER is what can be loaned out. Also some ER is used to meet sudden withdrawal demands.

5. Actual(Total) reservesActual(Total) reserves – RR + ER.

6. Deposit MultiplierDeposit Multiplier – one/RR or 1/.10 or $1/10 cents or 10

MultipliersMultipliers 1/RR[$1/5 cents = 20]

1/5% = 20 1/25% = 4 1/10% = 10 1/33.3%= 3 1/12.5% = 8 1/40 = 2.5 1/20% = 5 1/50% = 2

7. BalanceBalance SheetSheet–statement of assets & liabilities[assets=liabilitiesassets=liabilities].

8. Discount RateDiscount Rate – when banks borrow from the Fedbanks borrow from the Fed. [symbolic-emergencies] “wholesale price of money”

9. Federal Funds RateFederal Funds Rate – banks borrow from other banksbanks borrow from other banks for overnight loans.

10. Prime RatePrime Rate – when a bank’s prime customersprime customers [good credit] get loans. “retail price of money”

11. Buying BondsBuying Bonds – ““buying”buying” bonds means ““biggerbigger”” supply of money and “lower interest rates”. [So, more “C”, “Ig”, and “Xn” ]

12. Selling BondsSelling Bonds – ““selling”selling” bonds means ““smaller”smaller” supply of money and “higher interest rates”. [So, less “C”, “Ig”, and “Xn”]

How Banks and Thrifts CreateHow Banks and Thrifts Create MoneyMoney

RRRR Excess ReservesExcess Reserves

Total (Actual) ReservesTotal (Actual) Reserves

PMC = M x ER, so 10 x .90 =$9PMC = M x ER, so 10 x .90 =$9TMS = PMC[$9] + DD[$1] = $10TMS = PMC[$9] + DD[$1] = $10[[MSMS = = CurrencyCurrency + + DDDD of of PublicPublic]]

Dennis RodmanDennis Rodman depositsdeposits $1 $1 with A with A 10% RR10% RR

.1010 90 cents90 cents

One DollarOne Dollar One bank’s loan becomesOne bank’s loan becomesanother bank’s another bank’s DDDD..

Rodman’sRodman’s

Excess ReservesExcess Reserves

Total(Actual) ReservesTotal(Actual) Reserves

PMC = M x ER, so 10 x $1 = $10PMC = M x ER, so 10 x $1 = $10TMS [$10] = PMC[$10]TMS [$10] = PMC[$10]

[[MSMS = = CurrencyCurrency + + DDDD of of PublicPublic]]

Rodman’s Bank Borrows $1 From The Fed [10% RR]Rodman’s Bank Borrows $1 From The Fed [10% RR]

RRRR

One DollarOne Dollar

Rodman’s BankRodman’s Bank

00 One DollarOne Dollar

FedFed

BALANCE SHEET OF A COMMERCIAL BANK

ASSETS [cash]ASSETS [cash] = LIABILITIES[DD]LIABILITIES[DD][The cash is property of the bank] [“liable”, DDs are owed to depositors]

Cash Cash $100,000$100,000 DD $100,000DD $100,000

The GoldsmithsThe GoldsmithsFFractional ractional RReserve eserve BBanking anking SSystemystem

Money Creation & ReservesMoney Creation & Reserves[The current 10% RR is kept in a bank’s vault or[The current 10% RR is kept in a bank’s vault or

in a Fed vault.]in a Fed vault.]

Bank PanicsBank Panics and and RegulationRegulation

900.00900.00 One year “all u caneat” hot wings at

Hooters

Dog that can YoYo

$1,000 DD by Calli [MSMS=CurrencyCurrency+DDDD of PublicPublic]

MSMS grows by multiple of 1010

810.00810.00

729.00729.00

656.10656.10

$1,000.00$1,000.00

900.00900.00

810.00810.00

729.00729.00

Erin’s DD + PMC = TMS

$100.00$100.00

$90.00$90.00

$81.00$81.00

$72.90$72.90

$1,000.00 $1,000.00 ++ $9,000.00 $9,000.00 = $10,000.00$10,000.00

$$9,000.009,000.00PMC = ER[$900] x M[10] PMC =PMC =

New Deposits[New Reserves]

DDDD

New RequiredNew RequiredReservesReserves

RR=10%RR=10%

DDDD Created ByNew Loans

[equal to new ER]BankBank

AA

BB

CC

DD

$729.00 for a “cat bodyguard”

Smoking cat

900.00900.00

800.00800.00

TwoTwo MonkeysMonkeys

A chauffeur dogA chauffeur dog

$1,000 DD by Marie [MSMS==CurrencyCurrency++DDDD ofof PublicPublic]

MSMS grows by multiple of 55

640.00640.00

512.00512.00

409.60409.60

$1,000.00$1,000.00

800.00800.00

640.00640.00

512.00512.00

MarieMarie’s’s DD + PMC = TMS DD + PMC = TMS

$200.00$200.00

$160.00$160.00

$128.00$128.00

$102.40$102.40

$1,000.00$1,000.00 + + $4,000.00$4,000.00 = = $5,000.00$5,000.00

$4,000.00$4,000.00PMC = ER[$800 x M[5]PMC = ER[$800 x M[5] PMC =PMC =

New DepositsNew Deposits[New Reserves][New Reserves]

DDDD

New RequiredNew RequiredReservesReserves

RR=20%RR=20%

DDDD Created By Created ByNew LoansNew Loans

[equal to new ER][equal to new ER]BankBank

AA

BB

CC

DD

Hair careHair careforfor 1 1 yearyear

Purchase of aPurchase of adonkeydonkey800.00800.00

Cat withCat with

humanhuman teeth teeth

750.00750.00Prom date Prom date

w. w. Linda Blair Linda Blair

SharkShark to to keep keep in bathtubin bathtub

Teach Teach SStuart Little how tuart Little how

to brush to brush his teethhis teeth

$1,000 DD by Emily [MSMS==CurrencCurrencyy++DDDD ofof PublicPublic]

562.00562.00

422.00422.00

317.00317.00

237.00237.00

$1,000.00$1,000.00

750.00750.00

562.00562.00

422.00422.00

317.00317.00

EmEm’s’s DD + PMC = TMS DD + PMC = TMS

$250.00$250.00

$188.00$188.00

$140.00$140.00

$105.00$105.00

$80.00$80.00

$1,000.00$1,000.00 + + $3,000.00$3,000.00 = = $4,000.00$4,000.00

$$3,000.003,000.00PMC = ER[$750] x M[4]PMC = ER[$750] x M[4] PMCPMC = =

Frog Frog withwithteethteeth

New DepositsNew Deposits[New Reserves][New Reserves]

DDDD

New RequiredNew RequiredReservesReserves

RR=25%RR=25%

DDDD Created By Created ByNew LoansNew Loans

[equal to new ER][equal to new ER]BankBank

AA

BB

CC

DD

EE

750.00750.00

MSMS grows bygrows by multiple ofmultiple of 44

1. Joe BikerJoe Biker deposits $10,000 in his bank.

2. Suzie Rah RahSuzie Rah Rah borrows $8,000

RR = 20%

3. SuzieSuzie pays $8,000 for a new car.GoNow Auto deposits the $ in 2nd Bank.

4. 2nd Bank lends Sports Shop $6,400.

5. Eventually the MS will be $$5050,,000000

Joe

$$1010,,000000+$+$4040,,000000=$=$5050,,000000

MSMS$10,000 $8,000$18,000

MSMS$10,000 $8,000 $6,400$24,400

MSMS = = DDDD + + CurrencyCurrency of the of the PublicPublic[A DD of $10,000 will increase MS by another $40,000($50,000 MS]

RR=20%

MSMS is$10,000

Most Famous Most Famous ““Panic RunPanic Run”” in Moviein Movie HistoryHistory

Another Famous Another Famous ““Panic RunPanic Run” ” in Moviein Movie HistoryHistory

The children wanted to use their tuppance to buy bread crumbs to The children wanted to use their tuppance to buy bread crumbs to feed the pigeons, instead of investing it at the bank. When they said, feed the pigeons, instead of investing it at the bank. When they said, ““We want our money”, We want our money”, the other depositors thoughtthe other depositors thought it was a “bank run”. it was a “bank run”. [nominated for a record 13 academy awards - won 6][nominated for a record 13 academy awards - won 6]

History of Deposit InsuranceHistory of Deposit Insurance

In 1934, federaldeposit insurance made its debut at$2,500$2,500 to protect the average family’s savings and end thebank runsbank runs that hadshut down businessesand contributed to the Great DepressionGreat Depression.Through the yearsthe coverage rosein $5,000 increments$5,000 incrementsuntil the 70suntil the 70s when itjumped to $40,000.In 19801980, it was raisedto $100,000$100,000.

“Wow, you mean we can create money out of thin air.?”

Once upon a time there was a gold-smithygold-smithy who offered to store people’s gold in his vault. He issued paper receiptspaper receipts for the goldfor the gold, and it was not long before the townsfolk used the paper to purchase eggs and beerused the paper to purchase eggs and beer. The smithy’s paper receiptspaper receipts [first checksfirst checks] became as “good as gold.”“good as gold.” Our Smithy was not stupidnot stupid. He said to himself. “I have 2000 ounces of gold“I have 2000 ounces of goldstored in my vault, but in the last year I was never called upon to pay outstored in my vault, but in the last year I was never called upon to pay outmore than 100 ounces in a single daymore than 100 ounces in a single day. What harm could it do if I lent out say,half the goldhalf the gold I now have? I’ll still have more than enough to pay off any depositors that come in for a withdrawal. No one will know the difference. Icould earn 30 additional ounces of goldearn 30 additional ounces of gold each week. I think I’ll do it.”I think I’ll do it.”““The smithy has invented the Fractional Reserve Banking System.”The smithy has invented the Fractional Reserve Banking System.”Advantages of LendingAdvantages of Lending [One disadvantagedisadvantage was the possibility of “bank runs”“bank runs”]1. Depositors haven’t lostDepositors haven’t lost money [Goldsmiths paid them instead of other way]2. With the interestinterest you earned you could give some to depositorsgive some to depositors.3. The loans benefited the communityloans benefited the community thru loans

The Very Early Days Of BankingThe Very Early Days Of Banking

The fractional banking system The fractional banking system began when someone issuedbegan when someone issuedclaims for goldclaims for gold that already that alreadybelonged to someone else.belonged to someone else.

GreatestGreatestinventioninventionsincesincesliced breadsliced bread

There were more claims to gold thanthere wereounces ofgold.

ASSETS LIABILITIES & NET WORTH

TRANSACTION 1

Creating a bank$250,000$250,000 Cash

forCapital Stock

[owe][owe][own][own]

FORMATION FORMATION OF AOF A COMMERCIAL BANK COMMERCIAL BANK In In Lovelady, Lovelady, TexasTexas

Cash $250,000$250,000 Capital Stock $250,000$250,000

ASSETS LIABILITIES & NET WORTH

DepositDeposit Added to Vault Cash

[owe][owe][own][own]

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, Texas

Cash $250,000$250,000 Capital Stock $250,000$250,000

ASSETS LIABILITIES & NET WORTH

TRANSACTION 2

Acquiring Acquiring Property andProperty andEquipmentEquipment

$240,000240,000 Cash

[own][own] [owe][owe]

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, Texas

Cash $ 10,000$ 10,000 Property 240,000240,000

Capital Stock $250,000$250,000

Birth OF A COMMERCIAL BANKBirth OF A COMMERCIAL BANKIn Lovelady, TexasIn Lovelady, Texas

ASSETS LIABILITIES & NET WORTH

Lovelady BankLovelady Bank

[own][own] [owe][owe]

Cash $ 10,000$ 10,000Property 240,000240,000

Capital Stock $250,000$250,000

ASSETS LIABILITIES and NET WORTH

TRANSACTION 3

AcceptingDeposits

$100,000$100,000 Cash

$250,000$250,000 $250,000$250,000

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

Cash $110,000$110,000Property $240,000$240,000

DD $100,000$100,000Capital Stock 250,000250,000

ASSETS LIABILITIES and NET WORTH

[Was $10,000$10,000]]

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

$350,000$350,000

Cash $110,000$110,000Property 240,000240,000

DD $100,000$100,000Capital Stock 250,000250,000

ASSETS LIABILITIES and NET WORTH

[Was $10,000$10,000]]

$350,000$350,000

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

Cash $110,000$110,000Property 240,000240,000

DD $100,000$100,000Capital Stock 250,000250,000

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, Texas

ASSETS LIABILITIES & NET WORTH

TRANSACTION 4

A $50,000$50,000 check is written against the bank

$350,000$350,000 $350,000$350,000

Lovelady BankLovelady Bank

Cash $ 60,000$ 60,000Property 240,000240,000

DD $ 50,000$ 50,000Capital Stock 250,000250,000

ASSETS

[was[was $110,000$110,000]]

$300,000$300,000 $300,000$300,000

LIABILITIES & NET WORTH

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

NOTES:Banks create moneyby lending ER and destroy money byloan repayment.Purchasing bondsfrom the public alsocreates money.

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, Texas

Cash $ 60,000$ 60,000Property 240,000240,000

DD $ 50,000$ 50,000Capital Stock 250,000250,000

ASSETS

TRANSACTION 5

Make a loan from excess

reservesof $50,000$50,000

LIABILITY and NET WORTH

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

Cash $ 60,000$ 60,000Loans 50,00050,000Property 240,000240,000

DD $100,000$100,000Capital Stock 250,000250,000

ASSETS LIABILITIES and NET WORTH

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

Making the loancreated money!

Cash $ 60,000$ 60,000Loans 00Property 240,000240,000

DD $ 50,000$ 50,000Capital Stock 250,000250,000

ASSETS LIABILITIES AND NET WORTH

After a check for the $50,000$50,000is written against the bank

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, TexasLovelady BankLovelady Bank

Balance Sheet: Lovelady Bank [J oe Bozo buys 50 HP computers at $1,000 each, so

writes $50,000 check to Best Buy in Hateman, Texas]

Federal Reserve Bank of Dallas Assets Liabilities & Net Worth

Reserves of Lovelady Bank - $50,000 Reserves of Hateman Bank + $50,000

Lovelady Bank Hateman Bank

Assets Liabilities & Net Worth Assets Liabilities & Net Worth

Reserves -$50,000 DD -$50,000 Reserves +$50,000 DD +$50,000

(a) J oe Bozo pays Best Buy with a $50,000 check.

(c) Cleared check is returned to Lovelady Bank

(b) Hateman Bank sends check for collection

(a) Joe Bozo pays Best Buy a $50,000 check

Hateman BankHateman BankLovelady BankLovelady Bank

FEDERAL RESERVE BANK OF THE U.S.FEDERAL RESERVE BANK OF THE U.S.Dallas

Big “D”Big “D”

Joe BozoJoe Bozo

And What Happens If A Turtle Doesn’t And What Happens If A Turtle Doesn’t Keep Up with His Mortgage PaymentsKeep Up with His Mortgage Payments

Here, Here, he hashe has lost lost his his house.house.

This turtle is This turtle is subject to subject to foreclosure on his foreclosure on his house.house.

Reserves $ 10,000$ 10,000Loans 50,00050,000Property 240,000240,000

DD $ 50,000$ 50,000Capital Stock 250,000250,000

ASSETS LIABILITIES and NET WORTH

TRANSACTION 6

Repaying a loan with cash$50,000$50,000

Lovelady BankLovelady Bank

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, Texas

Reserves $ 10,000$ 10,000Loans 00Property 240,000240,000

DD $$ 00Capital Stock 250,000250,000

ASSETS LIABILITIES and NET WORTH

Lovelady BankLovelady Bank

FORMATION OF A COMMERCIAL BANK In FORMATION OF A COMMERCIAL BANK In Lovelady, TexasLovelady, Texas

$50,000$50,000 in money supplyis destroyed!

MULTIPLE DEPOSIT EXPANSION PROCESSMULTIPLE DEPOSIT EXPANSION PROCESSRR= 20%RR= 20%

BankBankAcquired reservesAcquired reserves

and depositsand depositsRequiredRequiredreservesreserves

ExcessExcessreservesreserves

Amount bankAmount bankcan lend - Newcan lend - Newmoney createdmoney created

AABBCCDDEEFFGGHHIIJJKKLLMMNNOther banksOther banks

$100.00$100.00 80.0080.00 64.0064.00 51.2051.20 40.9640.96 32.7732.77 26.2226.22 20.9820.98 16.7816.78 13.4213.42 10.7410.74 8.598.59 6.876.87 5.505.50 21.9721.97

$20.00$20.00 16.0016.00 12.8012.80 10.2410.24 8.198.19 6.556.55 5.245.24 4.204.20 3.363.36 2.682.68 2.152.15 1.721.72 1.371.37 1.101.10 4.404.40

$80.00$80.00 64.0064.00 51.2051.20 40.9640.96 32.7732.77 26.2226.22 20.9820.98 16.7816.78 13.4213.42 10.7410.74 8.598.59 6.876.87 5.505.50 4.404.40 17.5717.57

$80.00$80.00 64.0064.00 51.2051.20 40.9640.96 32.7732.77 26.2226.22 20.9820.98 16.7816.78 13.4213.42 10.7410.74 8.598.59 6.876.87 5.505.50 4.404.40 17.5717.57 $400.00$400.00 PP MMCC in the banking system [MxER]

TMS = $500.00TMS = $500.00

11stst 1010

$$357357ofof

the the $400$400

Maximumcheckable-

depositexpansion

= ERER x

MMMM RRRR

11

=

THE Money [Deposit] MULTIPLIERTHE Money [Deposit] MULTIPLIER

The The MMMM is the reciprocal of the is the reciprocal of the RRRR..

MMMM

Potential moneyPotential moneyCreation in theCreation in theBanking SystemBanking System

[PMC][PMC]

$1,000$1,000New reservesNew reserves

$$1,0001,000Initial

Deposit

$$3,0003,000PMCPMC thru bank lending

$$250250

RRRR

$750$750Excess

reserves

Ashley Olsen Ashley Olsen DepositsDeposits $1,000 in her $1,000 in her bankbank

TMS = $4,000TMS = $4,000

Ashley OlsenAshley Olsendeposits $$1,0001,000

RR = 25RR = 25%%

Ashley Olsen’sAshley Olsen’s

New reservesNew reserves

$1,000$1,000Excess

Reserves

$4,000$4,000PMCPMC thru Bank Lending

FedFed Buys A Buys A $1,000 Bond$1,000 Bond From From Ashley’s Ashley’s BankBank

TMSTMS is $ is $40004000

25% RR25% RRAshley Olsen’sAshley Olsen’s

NS 31-35 AP EconNS 31-35 AP Econ [[MSMS = = Currrency Currrency + + DDDD of of PublicPublic]]

RR+ER=TR; TR-RR=ER;RR+ER=TR; TR-RR=ER; TR-ER=RR; TR-ER=RR; MMXXERER=PMC=PMC; ; PMC(PMC(PublicPublic)+DD=TMS; PMC()+DD=TMS; PMC(FedFed)=TMS)=TMS

31. The $40 million deposit$40 million deposit of Currency into DDDD would result in MS staying at ($8/$40/$160) million. [MS composition changed from currency to DD]

32. The $40 million deposit$40 million deposit of currency into checking accounts will create ERER of ($20/$32/$40) million.

33. The Potential Money CreationPotential Money Creation of the banking system through loans is ($40/$160/$$200) mil. The Potential TMSPotential TMS [all DDDD of the public] could be as much as ($40/$160/$200) mil.

34. The RRRR applies to checkable deposits at (banks/S&Ls/ credit unions/ all depository institutions). 35. If the Duck National Bank has ER of $6,000ER of $6,000 & DDDD of $100,000of $100,000 what is the size of the bank’s TRTR if the RR is 25%RR is 25%? ($25,000/$75,000/$31,000) [RR($____)+ER($___)+TR($____)

Excess ReservesExcess Reserves prior to new currency deposit ( prior to new currency deposit (DDDD) = ) = $0$0Britney Spears Britney Spears depositsdeposits in the banking system = in the banking system = $40$40 millionmillionLegal Reserve RequirementLegal Reserve Requirement [RR] = 20%[RR] = 20%

25,00025,000 6,0006,000 31,00031,000

NS 36-45 NS 36-45 [[MSMS = = CurrrencyCurrrency++DDDD of of PublicPublic]]

36. A stranger depositsdeposits $1,000$1,000 in a bank that has a RR of 10%RR of 10%.. The maximum possible change in the dollar value of the local bank’s loans would be $______. PMCPMC[MM XX ERER] in the banking system is $_____. Potential TMSPotential TMS could become as high as $_______.37. Suppose a commercial bank has DDDD of of $100,000$100,000 and the RR is 10%RR is 10%. If the bank’s RR RR && ER are equal ER are equal, then its TRTR are ($10,000/$20,000/$30,000).38. Total Reserves (minus/plus) RR = ERER.39. Suppose the Thunderduck Bank has DDDD of of $500,000$500,000 & the RR is 10%RR is 10%. If the institution has ER of $4,000ER of $4,000 then its TRTR are ($46,000/$54,000/$4,000).40. If ERER in a bank are $4,000are $4,000, DDDD areare $40,000$40,000, & the RR is 10%RR is 10%, then TRTR are ($4,000/$8,000). 41. The main purpose of the RRmain purpose of the RR is to (have funds for emergency withdrawals/ influence the lending ability of commercial banks). 42. If I write you a check for $1check for $1 & we both have our checking accts at the Poorman Bank, the bank’s balance sheet will (increase/decrease/be unchanged).43. Banks (create/destroy) money when they make loansmake loans and repaying bankrepaying bank loansloans (create/destroy) money.44. When a bank loan is repaidbank loan is repaid the MSMS is (increased/decreased).45. The Fed Funds rateFed Funds rate is a loan by one bank (to another bank/from the Fed).

RR+ER=TR; TR-RR=ER;RR+ER=TR; TR-RR=ER; TR-ER=RR; TR-ER=RR; MMXXERER=PMC=PMC; ; PMC(PMC(PublicPublic)+DD=TMS; PMC()+DD=TMS; PMC(FedFed)=TMS)=TMS

900900 9,0009,00010,00010,000

47. If borrowers take a portion of their loans as cashloans as cash, the maximum amount by which the banking system increases the MSMS by lending will (increase/decrease).

NS 46-47 NS 46-47 [[MSMS = = CurrrencyCurrrency++DDDD of of PublicPublic]]

Leakages Leakages (limitations)(limitations) of the Money Creating Process of the Money Creating Process 1. Cash leakages [taking part of loan in cash] 1. Cash leakages [taking part of loan in cash] 2. ER (banks don’t loan it or we don’t borrow]2. ER (banks don’t loan it or we don’t borrow]

RR+ER=TR; TR-RR=ER;RR+ER=TR; TR-RR=ER; TR-ER=RR; TR-ER=RR; MMXXERER=PMC=PMC; ; PMC(PMC(PublicPublic)+DD=TMS; PMC()+DD=TMS; PMC(FedFed)=TMS)=TMS

46. If the RR was loweredRR was lowered [say, from 50% to 10%], the size of the monetary multipliermonetary multiplier [MMMM] would (increase/decrease).

Money SupplyMoney Supply == DDDD + + CurrencyCurrency of theof the PublicPublic “PMC” “PMC”“TMS”

ER Loans Crea. In “Potential”

$100[$100[1010%% RRRR]] [1st Bank] [1st Bank] System Total MSBanksBanks//PublicPublic DDDD [ [$100$100]] $90$90 $90 $900 $1,000$90 $900 $1,000

Fed Fed //PublicPublic//BBanksanks DDDD[[$100$100] ] $90$90 $90 $900 $1,000$90 $900 $1,000 [[**FedFed buys bonds frombuys bonds from publicpublic who put the money in theirwho put the money in their DDDD]]

BBanksanks//FedFed FedFed LLoanoan[$[$100100]] $100$100 $100 $1,000 $1,000$100 $1,000 $1,000 [or sells bonds to[or sells bonds to FedFed] ]

“ “PMC” “PMC”PMC” “PMC” “TMS” “TMS” ERER Loans Loans CCrea.rea. In “Potential” In “Potential”

$100 [$100 [2020%% RRRR] ] [1[1stst Bank] Bank] [[11stst Bank] Bank] SystemSystem Total MSTotal MSBanksBanks//PublicPublic DDDD [$100] [$100] $80$80 $80 $400 $500 $80 $400 $500

FedFed//PublicPublic//BBanksanks DDDD [[$100$100]] $80$80 $80 $400$80 $400 $500 $500 [[**Fed Fed buys bonds frombuys bonds from publicpublic who put the money in theirwho put the money in their DDDD]]

BanksBanks//FedFed FedFed LLoanoan[$100[$100] ] $100$100 $100 $500$100 $500 $500 $500 [or sells bonds to[or sells bonds to FedFed]]

New reservesNew reserves$800$800

ExcessExcessReservesReserves

$$40004000PMCPMC thru Bank Lending

SanjayaSanjaya DepositsDeposits $1,000$1,000 In HisIn His BankBank[RR is 20[RR is 20%%]]

$$200200

RRRR

$$10001000Initial

Deposit

TMSTMS is $$5,0005,000

SanjayaSanjaya [member[member of the public] of the public]

Sanjaya’sSanjaya’s

New reservesNew reserves$1,000$1,000Excess

Reserves

$$5,0005,000PMC thru Bank System Lending

FedFed buys a buys a $$1,0001,000 Bond fromBond from Sanjaya’s Sanjaya’s BankBank

TMSTMS is is $5000$5000

20% RR20% RRFedFedSanjaya’sSanjaya’s

RRRR Excess ReservesExcess Reserves

Total(Actual) ReservesTotal(Actual) Reserves

PMC = M x ER, so 5 x .80 = $4PMC = M x ER, so 5 x .80 = $4TMS = PMC[$4] + DD[$1] = $5TMS = PMC[$4] + DD[$1] = $5[MS = Currency + DD of Public][MS = Currency + DD of Public]

Eva LongoriaEva Longoria DepositsDeposits $1$1 with a with a 20% RR20% RR

.2020 80 cents80 cents

One DollarOne Dollar

Eva LongoriaEva Longoria’s’s

Excess ReservesExcess Reserves

Total(ActualTotal(Actual) Reserves) Reserves

PMC = M x ER, so 5 x $1 = $5PMC = M x ER, so 5 x $1 = $5TMS [$5] = PMC [$5]TMS [$5] = PMC [$5][[MSMS = = currencycurrency + + DDDD of of PublicPublic]]

Eva’s Bank Borrows $1 From The Fed [20% RR]Eva’s Bank Borrows $1 From The Fed [20% RR]

00 One DollarOne Dollar

RRRR

One DollarOne Dollar

Eva Longoria’sEva Longoria’s FedFed

$5,000.00$5,000.00 2,500.002,500.00

Prom DanceProm Dancelessons withlessons withN. DynamiteN. Dynamite

$1,000 DD by Katy [MSMS==CurrencyCurrency++DDDD ofof PublicPublic]

MSMS grows by multiple of 22

1,250.001,250.00

625.00625.00

312.50312.50

2,500.002,500.00

1,250.001,250.00

625.00625.00

KatyKaty’s’s DD + PMC = TMS DD + PMC = TMS

$$2,500.002,500.00

$1,250.00$1,250.00

$625.00$625.00

$312.50$312.50

$5,000.00$5,000.00 + + $5,000.00$5,000.00 = = $10,000.00$10,000.00

$5,000.00$5,000.00PMC = ER[$2,500 x M[2]PMC = ER[$2,500 x M[2] PMC =PMC =

New DepositsNew Deposits[New Reserves][New Reserves]

DDDD

New RequiredNew RequiredReservesReserves

RR=50%RR=50%

DDDD Created By Created ByNew LoansNew Loans

[equal to new ER][equal to new ER]BankBank

AA

BB

CC

DD

Duck thatDuck thatcan dancecan danceDance Dance

Lessons w. Lessons w. Laura BushLaura Bush

Hunting withHunting withDick CheneyDick Cheney

2,500.002,500.00

Money Creation FormulasMoney Creation Formulas[[MSMS = = CurrencyCurrency + + DDDD of of publicpublic]]

No PublicNo Public: [: [FedFed gives $1.00 loan to agives $1.00 loan to a bankbank]]1.1. ER x MER x MMM = = PMCPMC & & TMSTMS

PublicPublic

FedFed

RRRR ++ ERER == TRTRTR - RR = ERTR - RR = ERTR - ER = RRTR - ER = RR

PublicPublic:: Student Student depositsdeposits $1.00$1.00 in ain a bankbank1. ER ER [[DDDD-RR] -RR] x Mx MMM = = PMCPMC2. PMCPMC + 1 + 1stst DDDD = =TMSTMS

[RR[RR++ERER==TR; TRTR; TR--RRRR==ER; TRER; TR--ERER==RR; MxERRR; MxER==PMC; PMC(PMC; PMC(PublicPublic)+1)+1stst DDDD=TMS; PMC(=TMS; PMC(FedFed)=TMS])=TMS]

MSMS = = CurrencyCurrency + + DDDD of of PublicPublic[Money borrowed from the [Money borrowed from the FedFed [or gained thru bond sales][or gained thru bond sales] is ER & can be loaned out] is ER & can be loaned out]9. RR is 25%; 9. RR is 25%; Econ BankEcon Bank borrows $25,000 from the borrows $25,000 from the FedFed; its ER are increased by; its ER are increased by$______. P$______. Potential otential MMoneyoney C Creationreation in thein the system is system is $_______. P$_______. Potential otential TMS is $_______.TMS is $_______.10. RR10. RR is is 5050%%; a ; a bankbank borrows $20,000 borrows $20,000 from thefrom the FedFed; ; thisthis one bank’sone bank’s ER ER are increasedare increased

by $by $_____. P_____. Potentialotential MMoney oney CCreationreation in thein the system system is is $______. P$______. Potential otential TMS TMS is $______is $______

11. RR is 20%; the 11. RR is 20%; the Duck BankDuck Bank sells $10 M of bonds to the sells $10 M of bonds to the FedFed; Duck Bank’s ER are; Duck Bank’s ER are increasedincreased by by $___million. P$___million. PMC in theMC in the system is $__________. TMS is $__________. system is $__________. TMS is $__________.12. RR is 20%; 12. RR is 20%; FedFed buys $50,000 of securities from buys $50,000 of securities from Keynes BankKeynes Bank. Its ER are . Its ER are increased by $___________. Potential Money Creation in the banking system isincreased by $___________. Potential Money Creation in the banking system is $______________. Potential TMS is $___________.$______________. Potential TMS is $___________.13.13. 25% RR; 25% RR; FedFed buys $400 million of bonds from the buys $400 million of bonds from the Friar BankFriar Bank. This one. This one bank’s ER are increased by $_____million.bank’s ER are increased by $_____million.14. RR is 50%; the 14. RR is 50%; the FedFed sells $200 million of bonds to a sells $200 million of bonds to a bankbank; its ER are; its ER are (increased/decreased) by $_______. Potential Money Creation in the(increased/decreased) by $_______. Potential Money Creation in the banking system is (increased/decreased) by $________.banking system is (increased/decreased) by $________.15. RR is 10%; a 15. RR is 10%; a bankbank borrows $10 million from the borrows $10 million from the FedFed; this one bank’s; this one bank’s ER are increased by $_______ million. PMC in the banking system is ER are increased by $_______ million. PMC in the banking system is $_______million. Potential TMS is $_______million. $_______million. Potential TMS is $_______million.

BanksBanks and the and the FedFed

25,00025,000 100,000100,000 100,000100,000

20,00020,000 40,00040,000 40,00040,000

1010 50 million50 million 50 million50 million

50,00050,000250,000250,000 250,000250,000

400 400

200 M200 M400 M400 M

1010100 100 100 100

RR+ERRR+ER==TR; TR-RR=ER; TR; TR-RR=ER; TR-ER=RR;TR-ER=RR; M M x x ERER==PMC; PMC(PMC; PMC(PublicPublic)+1)+1stst DDDD==TMS; PMC(TMS; PMC(FedFed))==TMSTMS

BanksBanks & & PublicPublic (all(all DDDD of of PublicPublic are subject to theare subject to the RR; RR; rest is ER & can be loaned out)rest is ER & can be loaned out)

1. No ER & RR is 20%; 1. No ER & RR is 20%; DDDD of $10 M is made in the of $10 M is made in the Thunder BankThunder Bank. . MSMS is is $___million. ER increase by $___million. Potential Money Creation in the $___million. ER increase by $___million. Potential Money Creation in the banking system is $_____M. Potential TMS is $____million.banking system is $_____M. Potential TMS is $____million.2. T2. There are nohere are no ER ER & & RR is 25% & RR is 25% & $16,000$16,000 is deposited is deposited in thein the Duck BankDuck Bank. . MSMS is is $_______. This one bank can increase its loans by a maximum of $_______. This one bank can increase its loans by a maximum of $_______. Potential Money Creation $_______. Potential Money Creation in thein the banking system is $_______. banking system is $_______. Potential Total Money Supply could be $__________.Potential Total Money Supply could be $__________.3. 3. Econ BankEcon Bank has has ER of $5,000; ER of $5,000; DDDD are are $100,000$100,000; RR; RR is is 25%. TR 25%. TR areare $_______. $_______.4. 4. DDDD are are $10,000$10,000; ER ; ER are $are $1,000; TR 1,000; TR are $are $3,000; RR 3,000; RR areare _________. _________. [TR-ER[TR-ER==RR].RR].

5. 5. Nomics BankNomics Bank has ER of $10,000; DD of $100,000; RR of 40%. TR are _________. has ER of $10,000; DD of $100,000; RR of 40%. TR are _________. With ER above, Potential Money Creation in the banking system is $__________.With ER above, Potential Money Creation in the banking system is $__________.6. 6. Friar BankFriar Bank has DD of $100,000; RR is 20%; RR & ER are equal. TR are $________. has DD of $100,000; RR is 20%; RR & ER are equal. TR are $________.7. 7. If ER in a If ER in a bankbank are $10,000; are $10,000; DDDD are are $200,000$200,000, , & the& the RR are 10%. TR are $_______. RR are 10%. TR are $_______.8. 8. NNo o ER & RRER & RR is is 25%. 25%. DDDD of of $100,000$100,000 is madeis made. MS. MS is is $_______. This single bank $_______. This single bank cancan

increase its loans by $_______. PMC increase its loans by $_______. PMC in thein the systemsystem is $________. TMS is $________. TMS is is $________.$________.

10 10 8840 40 50 50

16,00016,00012,00012,000 48,00048,000

64,00064,00030,00030,000

$2,000$2,000$50,000$50,00025,00025,000

40,00040,00030,00030,000

100,000100,00075,00075,000 300,000300,000 400,000400,000

BanksBanks and theand the PublicPublic

MSMS = = currencycurrency + + DDDD of of PublicPublic

[RR[RR++ERER=T=TR; TR-RRR; TR-RR==ER; TRER; TR--ERER==RR; MxERRR; MxER==PMC; PMC(PMC; PMC(PublicPublic)+1)+1stst DDDD==TMS; PMC(TMS; PMC(FedFed))==TMS]TMS]

MSMS = = CurrencyCurrency + + DDDD of the of the PublicPublic [When FedFed buys securities from PublicPublic, they will put the money in their DDDD]16. RR is 50%; FedFed buys $10 M of bonds from the PublicPublic. MSMS is increased by _______. ER are increased by ____. PMC in the system is _______. Potential TMS is _______.17. RR is 25%; FedFed buys $100 M of bonds from the PublicPublic. The MSMS is increased _______. ER are increased by ______. PMC in the system is _______. Potential TMS is ________.18. RR is 50%; FedFed sells $200 M of bonds to the PublicPublic. The MSMS is (incr/decr) by __________. ER are (incr/decr) by _________. PMC in the banking system is (increased/decreased) by _______. Potential TMS is (incr/decr) by __________.19. RR is 20%; FedFed buys $5 million of securities from the PublicPublic. The MSMS is increased by _______. ER are increased by _______. Potential Money Creation in the banking system is _______. Potential TMS is _________.20. RR is 10%; FedFed buys $50 million of bonds from the PublicPublic. The MSMS is increased by _______. ER are increased by _______. PMC in the banking system is __________. Potential Total Money Supply is __________.

$10 M$10 M$5 M$5 M $10 M$10 M $20 M$20 M

$$100100 M M$75 M$75 M $300 M$300 M $400 M$400 M

$200 M$200 M $100 M$100 M$200 M$200 M $400 M$400 M

$5 M$5 M $4 M$4 M$20 M$20 M $25 M$25 M

$50 M$50 M $45 M$45 M$450$450 M M $500 M$500 M

FedFed and theand the PublicPublic

All of tAll of the $10,000 loan would be ER. Boo Bank could loan it all out so it could result in a PMC and TMShe $10,000 loan would be ER. Boo Bank could loan it all out so it could result in a PMC and TMS

of $50,000. [of $50,000. [MMMM of 10 x $10,000 = $50,000] of 10 x $10,000 = $50,000]

1. RR is 20%RR is 20% & Boo Radley’s Bank borrows $10,000 $10,000 from the Fed. The impact of this loan on the bank’s ER and then TMS are: [Remember again: MSMS = = CCurrencyurrency + + DDDD of of publicpublic](A) ER would increase by $10,000 & the maximum increase in TMS would be $50,000. (B) ER would increase by $8,000 & the maximum increase in TMS would be $50,000 (C) ER would increase by $8,000 & the maximum increase in MS would be $40,000 (D) ER would increase by $10,000 & the maximum increase in MS would be $40,000. (E) ER would increase by $40,000 & the maximum increase in MS would be $50,000.

1. The RR is 20%RR is 20% & Boo Radley depositsdeposits $10,000 $10,000 in the Econ Bank that he has been saving in a coffee can in a tree. The impact of this impact of this transaction on the ER transaction on the ER of the Econ Bank & the potential increase in potential increase in the the money supplymoney supply would be: [Remember: MSMS = = CCurrencyurrency + + DDDD of of publicpublic](A) ER would increase by $10,000 & the maximum increase in TMS would be $50,000. (B) ER would increase by $8,000 & the maximum increase in TMS would be $50,000 (C) ER would increase by $8,000 & the maximum increase in MS would be $40,000 (D) ER would increase by $10,000 & the maximum increase in MS would be $40,000. (E) ER would increase by $40,000 & the maximum increase in MS would be $50,000.

TThe he MS [CashMS [Cash or or DD DD of theof the public] public] was was $10,000 cash. When he deposited $10,000 cash. When he deposited the $the $10,000, 10,000, the the EconEcon Bank could loan out ER of $8,000. The $8,000 x MBank could loan out ER of $8,000. The $8,000 x MMM of 5 became $40,000 for TMS of $50,000. of 5 became $40,000 for TMS of $50,000. So, $10,000 MS of cash increased MS by $40,000 to get the total money supply of So, $10,000 MS of cash increased MS by $40,000 to get the total money supply of $50,000.$50,000.

BooBoo

BooBoo

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal RR is RR is 10%10%.. If Emilia deposits the $100 billEmilia deposits the $100 bill she received as a graduation gift from her grandfather into her checking account, the maximum increase in the total money supplyincrease in the total money supply will be

a. $10

b. $100

c. $900

d. $1,000

e. $1,100

Remember that currency is also MS. So, the $100 bill was MS whenRemember that currency is also MS. So, the $100 bill was MS whenthis began. When little Emilia deposited the $100, the compositionthis began. When little Emilia deposited the $100, the compositionof the MS didn’t increase. It just changed from currency to DD.of the MS didn’t increase. It just changed from currency to DD.Now, with the RR at 10%, $90 was loaned by the first bank and withNow, with the RR at 10%, $90 was loaned by the first bank and witha MM of 10, the MS a MM of 10, the MS increased by $900increased by $900 more as the TMS eventually more as the TMS eventuallybecame $10,000.became $10,000.

[[MSMS==CurrCurr. + . + DDDD of of PublicPublic]][RR+ER=TR; TR-RR=ER; [RR+ER=TR; TR-RR=ER; TR-ER=RR;TR-ER=RR; MxER=PMC; PMC( MxER=PMC; PMC(PublicPublic)+1st)+1stDDDD=TMS; PMC(=TMS; PMC(FedFed)=TMS])=TMS]

1. The 1. The Hale BankHale Bank [with no ER][with no ER] borrows $100,000 from the borrows $100,000 from the FedFed.. With RR of 50 With RR of 50%%

the the Hale BankHale Bank can increase its loans by a maximum of __________. PMC in can increase its loans by a maximum of __________. PMC in the banking system is __________. Potential TMS is ______________.the banking system is __________. Potential TMS is ______________.2. The 2. The DavisDavis BankBank has has DDDD of $10,000; RR is 10%; RR & ER of $10,000; RR is 10%; RR & ER are are equal. TR equal. TR areare ______. ______.3. RR is 20%; 3. RR is 20%; FedFed buys $50,000 of securities from the buys $50,000 of securities from the public public [Sarah Palmer][Sarah Palmer] PMC in the banking system is __________. Potential TMS is ____________.PMC in the banking system is __________. Potential TMS is ____________.4. RR is 40%; 4. RR is 40%; BuzonBuzon BBankank borrows $1 borrows $1 million million from the from the FedFed.. This bank can increase This bank can increase its loans by a maximum of _______ __. PMC is __________. TMS is __________.its loans by a maximum of _______ __. PMC is __________. TMS is __________.5. RR is 10% & there are no ER; $10,000 is 5. RR is 10% & there are no ER; $10,000 is depositeddeposited in the in the Rodriquez BankRodriquez Bank. . This bank can increase its loans by a maximum of __________. Possible MoneyThis bank can increase its loans by a maximum of __________. Possible Money Creation in the banking system is ___________. Potential TMs is _____________.Creation in the banking system is ___________. Potential TMs is _____________.6. There are no ER in the 6. There are no ER in the Vehslage BankVehslage Bank. Nicole now . Nicole now depositsdeposits $10.00. With $10.00. With a RR of 20%, PMC in the system is __________. Potential TMS is ___________. a RR of 20%, PMC in the system is __________. Potential TMS is ___________. 7. The 7. The Terrones BankTerrones Bank has a RR of 50%; the has a RR of 50%; the FedFed buys $50 million of bonds from buys $50 million of bonds from this bank. PMC in the system is __________. Potential TMS is __________.this bank. PMC in the system is __________. Potential TMS is __________.8. 8. Marin BankMarin Bank has ER of $50,000; DD of $100,000, & a RR of 20%. TR are ________. has ER of $50,000; DD of $100,000, & a RR of 20%. TR are ________.9. RR is 40%; the 9. RR is 40%; the CollinsCollins BankBank borrows $10 million from the borrows $10 million from the FedFed. This bank’s ER. This bank’s ER are increased by _________. PMC is __________. Potential TMS is ___________. are increased by _________. PMC is __________. Potential TMS is ___________. 10. RR is 10%; RR is 10%; Tran BankTran Bank borrows $5 from the borrows $5 from the FedFed; the ; the Tran Bank’sTran Bank’s ER ER are increased by _______. PMC is __________. Potential TMS is __________. are increased by _______. PMC is __________. Potential TMS is __________.

$100,000$100,000$200,000$200,000 $200,000$200,000

$2,000$2,000

$200,000$200,000 $250,000$250,000

$$11 million million $2.5$2.5 milmil.. $$2.52.5 M M

$9,000$9,000$90,000$90,000 $100,000$100,000

$40.00$40.00 $50.00$50.00

$100 M$100 M $100 M$100 M $70,000$70,000

$10 M$10 M $25 M$25 M $25 M$25 M

$5.00$5.00 $50.00$50.00 $50.00$50.00

Commercial BanksCommercial Banks FedFed PublicPublic

[[MSMS = = CurrCurrency + ency + DDDD of of PublicPublic] ] [RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC([RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC(PublicPublic)+1)+1stst DDDD=TMS; PMC(=TMS; PMC(FedFed)=PMC])=PMC]

1. RR1. RR is is 2525% & the% & the BoaseBoase Bank Bank has nohas no ER. ER. GeofGeof depositsdeposits((DDDD) $100,000 ) $100,000 there.there. ThisThis

bank bank can increase itscan increase its loans loans by aby a maximum maximum of of ______. PMC is ______. TMS ______. PMC is ______. TMS is is _______._______.2. RR2. RR is is 50%; the 50%; the SStansbury tansbury Plaza BankPlaza Bank borrows $100,000 borrows $100,000 from thefrom the FedFed. This . This one bank canone bank can

increase its loans by a maximum of ________. PMC is _______. TMS is ________.increase its loans by a maximum of ________. PMC is _______. TMS is ________.3. RR is 25%; 3. RR is 25%; FedFed buys $100,000 of securities from the buys $100,000 of securities from the publipublic [c [Mary GangelMary Gangel]]. . Potential Money Creation in the system is ________. Potential TMS is _________.Potential Money Creation in the system is ________. Potential TMS is _________.4. T4. The he Curtis BankCurtis Bank has has DDDD of of $200,000; RR$200,000; RR is is 10%; RR & ER 10%; RR & ER are equalare equal. TR . TR are are _______._______.5. T5. The he Recsnik Recsnik BankBank,, with no ER, borrows $200,000 with no ER, borrows $200,000 from thefrom the FedFed. With. With a a RRRR of of 10%,10%, this bank can increase its loans by _________. PMC in the system is __________.this bank can increase its loans by _________. PMC in the system is __________.6. RR is 20%; the 6. RR is 20%; the Morell BankMorell Bank borrows $1 from the borrows $1 from the FedFed; this bank can increase; this bank can increase its loans by a maximum of _________. PMC in the banking system is __________.its loans by a maximum of _________. PMC in the banking system is __________.7. RR is 50%; the 7. RR is 50%; the Cusimano BankCusimano Bank borrows $1 million from the borrows $1 million from the FedFed; this bank’s ER; this bank’s ER are increased by _______. PMC in the system is __________. TMS is __________.are increased by _______. PMC in the system is __________. TMS is __________.8. 8. The The MastersMasters BBankank has has ER ER of $of $20,000; DD 20,000; DD of $of $200,000, 200,000, & a& a RR RR of of 10%. TR 10%. TR areare ______. ______.9. RR is 25%; 9. RR is 25%; FedFed buys $100 million of bonds from the buys $100 million of bonds from the GreenGreen Bank Bank. Potential . Potential Money creation Money creation in thein the banking system is ________. Potential TMS is ____________. banking system is ________. Potential TMS is ____________.10. There are no ER in the 10. There are no ER in the Farrell BankFarrell Bank. Erin . Erin depositsdeposits $2.50. With RR of 20%, $2.50. With RR of 20%, PMC in the banking system is ____________. Potential TMS is _____________. PMC in the banking system is ____________. Potential TMS is _____________.

$100,000$100,000

$100,000$100,000 $200,000$200,000 $200,000$200,000

$300,000$300,000 $400,000$400,000$40,000$40,000

$200,000$200,000 $2 million$2 million

$1.00$1.00 $5.00$5.00

$1 mil.$1 mil. $2 million$2 million $2 million$2 million$40,000$40,000

$400 mil.$400 mil. $400 million$400 million

$10.00$10.00 $12.50$12.50

BanksBanks FedFed PublicPublic

$300,000$300,000 $400,000$400,000$75,000$75,000

[[MSMS = = CurrCurr. + . + DDDD of of PublicPublic]] [RR+ER[RR+ER==TR; TR-RRTR; TR-RR==ER; ER; TR-ER=RR;TR-ER=RR; MxER MxER==PMC;PMC(PMC;PMC(PublicPublic)+1)+1stst DDDD==TMS; PMC(TMS; PMC(FedFed)=TMS])=TMS]

1. RR is 5% & there are no ER in the 1. RR is 5% & there are no ER in the Vehslage BankVehslage Bank. Trey . Trey depositsdeposits[[DDDD] $1.00 ] $1.00 there. This one bank can increase its loans by a maximum of _______.there. This one bank can increase its loans by a maximum of _______.2. RR is 25%; the 2. RR is 25%; the Rigal BankRigal Bank borrows $1 million from the borrows $1 million from the FedFed. . This one bank can increase its loans by a maximum of ____________.This one bank can increase its loans by a maximum of ____________.3. RR is 50%; the 3. RR is 50%; the FedFed buys $100,000 of securities from the buys $100,000 of securities from the public public [Kate Wells].[Kate Wells].

Potential Money Creation in the banking system is ____________.Potential Money Creation in the banking system is ____________.4. The 4. The Secker-Dog Killing BankSecker-Dog Killing Bank has DD of $400,000; RR is 10%; RR & ER are equal. has DD of $400,000; RR is 10%; RR & ER are equal. TR are ____________.TR are ____________.5. The 5. The Terrones Bank Terrones Bank , with no ER, borrows $500,000 from the , with no ER, borrows $500,000 from the FedFed.. With a RR With a RR of 10%, how much can this single bank increase its loans? ____________of 10%, how much can this single bank increase its loans? ____________6. RR is 20%; the 6. RR is 20%; the FedFed buys $25,000 of securities from the buys $25,000 of securities from the public public [Natalie Marin].[Natalie Marin].

Potential Money Creation in the banking system is ____________.Potential Money Creation in the banking system is ____________.7. RR is 20%; the 7. RR is 20%; the Rodriquez-Loser BankRodriquez-Loser Bank borrows $1 million from the borrows $1 million from the FedFed. . This single bank’s ER are increased by ____________. This single bank’s ER are increased by ____________. 8. RR is 25%; 8. RR is 25%; FedFed buys $200 million of securities from the buys $200 million of securities from the public public [Rose].[Rose].

Potential Total Money Supply[TMS] could be as much as _______________.Potential Total Money Supply[TMS] could be as much as _______________.9. The RR is 25% & the 9. The RR is 25% & the FedFed buys $10 million of bonds from the $10 million of bonds from the Hicks BankHicks Bank.. Potential Money Creation in the banking system could be ____________.Potential Money Creation in the banking system could be ____________.10. There are no excess reserves in the 10. There are no excess reserves in the Stansbury BankStansbury Bank. With RR of 50%, Courtney . With RR of 50%, Courtney depositsdeposits [ [DDDD] $50.00 ] $50.00 there.there. P Potential otential Money Creation Money Creation in thein the system is _________. system is _________.

.95

$1 million$1 million

$100,000

$500,000$500,000

$100,000$100,000

$1 $1 millionmillion

$800 million$800 million

$30 million$30 million

$50.00$50.00

$80,000$80,000

Commercial BanksCommercial Banks FedFed PublicPublic

1. If the RR is 40% and the FedFed buys $100 M of bonds from the publicpublic [Sarah],[Sarah], then the MSMS is increased by _______. ER are

increased by ______. PMC is _______. TMS would be ______.2. RR is 50% and the BoldingBolding Bank Bank borrows $100 M from the

FedFed. As a result, RR are increased by ______. ER is increased

by _______. PMC and TMS is increased by ________.3. CollinsCollins BankBank has DDDD of $400,000 and the RR is 25%. If RR and ER are equal, then TR are _______.4. The TranTran Bank Bank has ER of $60,000 & DDDD is $200,000$200,000. If the RR is 20%, TR are _________.5. RR is 20% & the FedFed buys $50 million of bonds from the publicpublic [[Geof B.Geof B.].]. The MSMS is increased by _______. ER are increased by _______. PMC is _______. TMS would be _________.

$100 M$100 M

$60 M$60 M $150 M$150 M $250 M$250 M

$100 M$100 M $200 M$200 M

$200,000$200,000

$100,000$100,000

$50 M$50 M$40 M$40 M $200 M$200 M $250 M$250 M

00

BanksBanks PublicPublic FedFed

RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC[RR+ER=TR; TR-RR=ER; TR-ER=RR; MxER=PMC; PMC[PublicPublic]+1]+1stst DDDD=TMS; PMC[=TMS; PMC[FedFed]= TMS]= TMS

Money Creation Problems from the 2005 Macro MC ExamMoney Creation Problems from the 2005 Macro MC Exam(87%)(87%) 40. Under a fractional reserve banking systemfractional reserve banking system, banks are required to a. keep part of their demand deposits as reserves b. expand the money supply when requested by the central bank c. insure their deposits against losses and bank runs d. pay a fraction of their interest income in taxes e. charge the same interest rate on all their loans(72%)(72%) 41. If a commercial bank has no ER and the RR is 10%, what is the value of new loans this single bank can issue if a new customer deposits $10,000? a. $100,000 b. $90,333 c. $10,000 d. $9,000 e. $1,000

AssetsAssets LiabilitiesLiabilities Total Reserves: $15,000 DD: $100,000

Securities: $70,000Loan: $15,000

(37%)(37%) 42. A commercial bank is facing the conditions given above. If the RR is 12%RR is 12% and the bank does not sell any of its securities, the maximum amount ofmaximum amount of additional lendingadditional lending this bank can undertake is a. $15,000 b. $12,000 c. $3,000 d. $1,800 e. 0(53%)(53%) 43. Assume the RR is 20%RR is 20%, but banks voluntarily keep some excess reserveskeep some excess reserves. A $1 million increase in new reserves$1 million increase in new reserves will result in a. an increase in the MS of $5 million c. decrease in MS of $1 millionb. an increase in the MS of less than $5 million d. decrease in the MS of $5 millione. a decrease in the MS of more than $5 million

The TR: $15,000, Securities: $70,000, andThe TR: $15,000, Securities: $70,000, and Loan: $15,000 total up to the $100,000 DD.Loan: $15,000 total up to the $100,000 DD.This bank This bank would havewould have to keep $12,000 of to keep $12,000 of their $100,000 in RR. With TR of $15,000, their $100,000 in RR. With TR of $15,000, they have $3,000 in ER to loan.they have $3,000 in ER to loan.

They could increase MS by $5 M, but They could increase MS by $5 M, but they are keeping some in ER, so MS they are keeping some in ER, so MS will increase by less than $5 million.will increase by less than $5 million.

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