ECON 2000 Chapter Notes - Chapter 18: Fractional-Reserve Banking, Monetary Base, Money Multiplier

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The money supply is determined not only by bank of canada policy, but also by the behaviour of households that hold money and of banks in which money is held. To understand money supply, we must understand the interaction between currency and deposits and how bank of canada policy influences these two components of money supply. 100-percent-reserve banking: the deposits that banks have received but have not lent out are called reserves. Some reserves are held in the vaults of local banks throughout the country, but most are held at a central bank such as the bank of canada. 100-percent- reserve banking means that all bank deposits are held as reserves: banks simply accept deposits, place the money in reserve, and leave the money there until the depositor makes a withdrawal or writes a cheque against the balance. If banks hold 100 percent of deposits in reserve, the banking system does not affect the supply of money.

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