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Lecture 12

ECON 101 Lecture 12: Ch12

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San Diego State University
ECON 101

Chapter 12 Money creation - Money is created when financial institutions accept donations (savings) and make loans (lending) - Assets: money that the bank claims/holds o Cash reserves o Loans made - Liabilities: money that the bank owes o 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 o 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 Bank - 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 Money multiplier = 1/reserve requirement - 1/10% - = 10 DeltaMS = money multiplier x deposit - = 10 x $100 - = $1000 Money creation - Leakages: money that leaves the money creation process - The potential money multiplier and the actual money multiplier are rarely the same because of money leakages - When banks choose not to loan all of their excess reserves, the actual money multiplier is reduced o The reduction in loans recirculates less money back through the banking system o Th
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