3/10/16
Ultimate Lenders --> Financial Intermediaries --> Ultimate Borrowers
What Banks Do - Basic Accounting Review
T-Account (Balance Sheet):
Statements of assets & liabilitiesAssets (Amounts owned):
Items to which a bank holds legal claimThe use of funds by financial intermediariesLiabilities (Amounts owned):
The legal claims against a bankThe sources of funds for financial intermediaries
Federal Reserve Bank (The Fed):
Houses the Secret Service7 board members appointed by President
Functions:
Uses paper currencySets reserve requirements & holds reserves of the banksIt lends money to the banks & charges them interestThey are check-clearing service for the banks Acts as personal bank for the government Supervises members' banksIt controls the money suplly in the economy
How do banks create money?
- By lending out deposits that are used multiple times.
Where do the loans come from?
- They come from depositers who take cash and place it in their banks.
How are the amounts of potential loans calculated?
- By using the balance sheet or the T-Account that consists of liabilities and assets
Bank liabilities (on the right side of T-Account)
#1 Demand Deposits or Checkable Deposits
- They belong to depositers and can be withdrawn by depositers
#2 Owner's Equity
- Values of stock held by the public ownership of bank shares
Bank assets (the left side of the T-Account)
#1 Required Reseves
- Percentage of demand deposirs that must be held in the vault so that some depositers have access to their money
#2 Excess Reseves
#3 Property
#4 Securities (Bonds)
#5 Loans
Reserve Requirement:
The Fed requites banks to always have some money readily available to meet the consumer's demand for cash.The amount set by the Fed, is the Required Reserve Ratio.The Required Reserve Ratio is the % of demand deposits (checking account balances) that must not be loaned outTypically the Required Reserve Ratio = 10%
The Three Types of Multiple deposit Expansion Question:
Type 1: Calculate the initial change in excess reserves the initial deposit
Type 2: Calculate the change in loans in banking system
Type 3: Calculate the change in the money supply.
*Sometimes Type 2 & Type 3 will have the same result (i.e. NO Fed involvement)
3/21/16
#1. The Reserve Requirement:
Only a small percent of your bank deposit is in the safe. The rest of your $ has been loaned out. The reserve requirement (reserve ratio) is the % of deposits that banks must hold in reserve and NOT loan out.)
- When the Fed increases the money supply it increases the amount of money held in bank deposits.
If there is a RECESSION, what should the Fed do to the Reserve Requirement?
- Decrease the Reserve Ratio
Banks hold less money & have more excess reservesBanks create more money by loaning out excessMoney supply increases, interest rates fall, AD goes up.
If there is INFLATION, what should the Fed do to the Reserve Requirement?
- Increase the Reserve Ratio
Banks hold more money & have less excess reservesBanks create less moneyMoney supply decease, interest rates up, AD goes down.
#2. The Discount Rate:
The Discount Rate is the interest rate that the Fed charges commercial banks.To INCREASE the Money Supply, the Fed should DECREASE the Discount Rate (Easy Money Policy)To DECREASE the Money Supply, the Fed should INCREASE the Discount Rate (Tight Money Policy)
#3. Open Market Operations:
The Fed buys/ sells government bonds (securities).This is the most important and widely used monetary policy.To INCREASE the Money Supply, the Fed should BUY government securities.To DECREASE the Money Supply, the Fed should SELL government securities.
Federal Funds Rate:
Where FDIC member banks loan each other overnight bonds. Prime Rate:
The interest rate that banks give to their most credit-worthy customers.
If the economy goes into recession, the real GDP will decrease for at least 6 months.
If the economy suffers from too much ddemand-pull inflation or cost inflation
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