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Lecture 13

# ECON 209 Lecture Notes - Lecture 13: Reserve Requirement, Commercial Bank, Savings Account

Department
Economics
Course Code
ECON 209
Professor
Paul Dickinson
Lecture
13

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ONLY ONE LECTURE IN THE WEEK - THURSDAY’S LECTURE WAS THE MIDTERM EVALUATION
LECTURE - Feb 23
1. The central bank: acts as a bank to the banking system, owned by the government but the
government has no control over what the bank does. The bank is independent from the gov,
it can only put ﬁscal policies in place
2. The commercial banks: take money for people to create accounts and deposit money into
them, makes loans and provides credit for over draw, they take people’s money and lend it
out again keeping the economy ﬂowing. They manage people’s wealth and have credit-card
services
I. Reserves: banks have a cash reserve which are pretty small compared to the amount of
cash people deposit (reserve ratio)
A. Each commercial bank has a target reserve ratio which is the fraction it wishes to keep
for reserves
1. Therefore the Canadian banking is a fractional-reserve system
B. if reserves > target reserves then it is excessive
C. Some Simplifying Assumptions:
1. banks invest only in loans
2. there are only demand deposits: checking accounts, saving accounts, ﬂexible/
ﬁxed GIC
3. ﬁxed target reserve ratio: by ﬁxed, it means it doesn't change the business cycle,
doesn't change unless there is a recession
4. no cash drain from the banking system: what the general public holds, the cash
drained is what the public holds without giving the bank
D. New deposit beings a long sequence of deposit creation:
1. round and round
2. EX: if the target reserve ratio is 20% and there is no cash drain, the new deposit of
\$100, will eventually expand deposits by \$500 because 1/5 reserve ratio will lead to
a 5X increase (5%)
a) the full amount of the new currency deposit is absorbed by banks as an increase
in desired reserves
b) GENERIC: with no cash drain and baking system’s target reserve ratio of V, ﬁnal
change in deposits = change in reserves (the new deposit) divided by V
(1) —> ^Deposits = (1/v) ^Reserves
With CASH DRAINS
I. if households hold a fraction of their deposits in cash, the deposit-creation process is
dampened
II. assume a ﬁxed proportion, so CASH DRAIN = c^D = change in cash held by general public
where c is the cash-deposit ratio
III. ^currency = ^reserves + cash drains
A. ^cash held by banks = ^reserves = v^D
B. ^cash held by public = cash drain = c^D
C. ^currency = v^D + c^D