ECON 101 Lecture Notes - Lecture 12: Federal Reserve Act, Federal Open Market Committee, Open Market Operation
Document Summary
Money is created when financial institutions accept donations (savings) and make loans (lending) Assets: money that the bank claims/holds: cash reserves, loans made. Liabilities: money that the bank owes: deposits made by customers. Reserve ratio is the level of reserves a bank holds as a percentage of total deposits. Reserve requirement is the minimum level of reserves that the government requires banks to maintain. Fractional reserve banking system: when someone deposits money into a bank account, the bank is required to hold part of this deposit as cash, or in an account with the regional federal reserve. Banks create money by loaning out their excess reserves. An initial deposit of cash can be turned into loans and deposits many times over. This is the power that the banking system has to create money. Money multiplier measures the potential or maximum amount that the money supply can increase when new deposits enter the system.
