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ECON 1P92 (65)
Lecture

ECON 1P92.docx

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Department
Economics
Course
ECON 1P92
Professor
Professor Cottrel
Semester
Winter

Description
ECON 1P92 03/07/13 Money Creation by Banking System Assumptions:  Banks can invest in only one kind of asset – loans  Only one kind od deposit – demand deposit  Fixed target reserve ratio  No cash drain from banking system The Creation of Deposit Money  Reserve ratio (v) of 20% = 20/100/ 0.2  Ratio of reserves to deposits (R/D)= v= 0.2 Assets Liabilities Cash and other 200 Deposits 1000 Reserves Loans 900 Capital 100 1100 1100  New deposit of 100 o Raises liabilities and assets (immediate reserves) by the same amount o Bank’s reserve ratio initially increases to 27% Assets Liabilities Cash and other 300 Deposits 1100 reserves Loans 900 Capital 100 1200 1200  Target reserves now (0.2 x 1100) = 220  1200-220 = 980  Bank now lends the excess of reserves of 480= (980-900)  Bank returns to its 20% reserve ratio Assets Liabilities Cash and other 220 Deposits 1100 reserves Loans 980 Capit
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