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ECON 1020 (99)
Lecture 74

ECON 1020 Lecture 74: Lecture 74

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ECON 1020
Ryan A.Compton

lc78 Demand deposit (liability) = 50,000 Capital stock (net worth) = 250,000 *** A single bank can onlylend an amount equal to its preloan excess reserves Transaction 6: Bank buys government securities from a dealer (deposits payment into chequing) Cash reserves (asset) = 60,000 o Securities (asset) = 50,000 o Property (asset) = 240,000 o Demand deposits (liability) = 100,000 o Capital Stock (net worth) = 250,000 Government Securities (IMPORTANT): Bond purchases from the public by the chartered banks increases the money supply Bond sales to the public decreases the money supply When currency in circulation andor demand deposits (M1) increases, money supply increases, and vise versa Cash reserves are NOT in circulation, therefore not M1, and not apart of money supply Profits, Liquidity, and the Overnight Lending Rate: Bankers have two conflicting goals: 1. Profit Banks goal is to make profit, therefore they want to lend a lot of money (interest rates increase money) 2. Liquidity How easily assets can be turned into money Overnight lending rate: paid on overnight loans to cover temporary shortages of reserves
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