ECON-200 Lecture Notes - Lecture 29: Fractional-Reserve Banking, Excess Reserves, Money Supply

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turquoiseturtle299

22 Dec 2020

School

Diablo Valley College

Department

Economics

Course

ECON-200

Professor

Sorce

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Document Summary

100% reserve banking would be a bank that accepts deposits but does not make loans. (because deposits that banks have received but not yet loaned out are called reserves) As people make deposits, the money supply changes from. Fractional reserve banking: if the flow of new deposits is roughly the same as the flow of withdrawals, and a bank keeps only a fraction of its deposits in reserve (and loans the rest out) The fraction of total deposits that a bank holds as reserves is called a reserve ratio. The fed sets a minimum amount of reserves that banks must hold, called reserve requirement; and banks can hold reserves above the legal minimum, called excess reserves. Ex: let"s say a bank holds 10% of its deposits as reserves. When a bank makes loans, the money supply increases, because they are loaning depositors money to other people, increasing currency; because money supply is currency plus demand deposits.

Related Questions

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

crimsonbadger400

Fill in the following blanks:

The money supply consists of Currency + Checkable Deposits (NOT including currency in bank's vaults and NOT including banks' deposits at the Fed). Before the First National Bank made the $90 loan, no one outside the bank held any currency, and Checkable Deposits were equal to 100, so the money supply was equal to 0 + 100 = 100.

When the First National Bank made the loan, the borrower received $90 in cash, but checkable deposits did not fall. Thus, the money supply was equal to $ (..........)of currency in the hands of the non-bank public plus $(........) of Deposits, for a total of $(............).

While cleaning your apartment, you find a $50 bill under the sofa cushion. You deposit the $50 into your checking account. If the reserve requirement is 20%, what is the maximum amount that the money supply could ultimately increase? (Remember that the money supply is Currency + Deposits - and that the amount of Currency fell by $50 when you put the cash in the bank).

The change in currency would be (...............) and the maximum ultimate change in deposits would be at most(..............) , so the money supply would rise by at most(..........) .

Suppose you deposit the $50, but the bank chooses not to lend any of its excess reserves. By how much would the money supply ultimately increase in this case?

The change in currency would be (................) and the ultimate change in deposits would be(............) , so the money supply would rise by(...........) .

raspberrywasp757

Assets	Liabilities
Reserves $2,000	Deposits $10,000
Loans 8,000

Refer to Table.

Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.

$400.
$680.
$750.

2.
Bank of Springfield

Assets		Liabilities
Reserves	$19,200	Deposits	$240,000
Loans	228,000

1. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?

5.00 per cent
8.00 per cent
8.42 per cent
95.00 per cent

2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value
medium of exchange
unit of account
None of the above is correct.

3. Under a fractional-reserve banking system, banks

hold more reserves than deposits.
generally lend out a majority of the funds deposited.
cause the money supply to fall by lending out reserves.
All of the above are correct.

4. Over one-time horizon or another, Fed policy decisions influence

inflation and employment.
inflation but not employment.
employment but not inflation.
neither inflation nor employment.

5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000

its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.

blushkoala783

ECON-200 Lecture Notes - Lecture 29: Fractional-Reserve Banking, Excess Reserves, Money Supply

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