ECON 2000 Chapter 19: Notes on The Financial System

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limegoldfish227

16 May 2016

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Letting m denote the money supply, c currency, and d deposits, we can write: The deposits that banks have received but have not lent out are called reserves. Let"s say that a bank went by a 100-percent-reserve banking system, and all of an economy"s ,000 is deposited in the bank, it"s balanced sheet would be as follows: The 1,000 is classified as an asset and a liability because it is cash that the bank now has, but that it still owes to its depositors. If banks hold 100 percent of deposits in reserve, the banking system does not affect the supply of money. When banks use funds to also make loans, we have fractional-reserve banking, a system under which banks keep only a fraction of their deposits in reserve. A 20% reserve-deposit ratio would look like: In this scenario, the supply of money increases by . In a system of fractional-reserve banking, banks create money.

Related Questions

Assets	Liabilities
Reserves $2,000	Deposits $10,000
Loans 8,000

Refer to Table.

Starting from the situation as depicted by the T-account, if someone deposits $500 into the First Bank of Fairfield, and if the bank makes new loans to keep its reserve ratio unchanged, then the number of new loans that it makes will be $320.

$400.
$680.
$750.

2.
Bank of Springfield

Assets		Liabilities
Reserves	$19,200	Deposits	$240,000
Loans	228,000

1. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?

5.00 per cent
8.00 per cent
8.42 per cent
95.00 per cent

2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?

store of value
medium of exchange
unit of account
None of the above is correct.

3. Under a fractional-reserve banking system, banks

hold more reserves than deposits.
generally lend out a majority of the funds deposited.
cause the money supply to fall by lending out reserves.
All of the above are correct.

4. Over one-time horizon or another, Fed policy decisions influence

inflation and employment.
inflation but not employment.
employment but not inflation.
neither inflation nor employment.

5. If a bank desires to hold no excess reserves, the reserve requirement is 5 per cent, and it receives a new deposit of $1,000

its required reserves increase by $50.
its total reserves initially increase by $1,000.
it will be able to make a new loan of up to $950.
All of the above are correct.

blushkoala783

The isolated nation of Islandia currently does not trade with other countries. The banking system of Islandia consists of four commercial banks' these banks deal with consumers and businesses and one central bank that deals exclusively with the commercial banks. The central bank has set a reserve requirement of 10 percent. The banks are creatively named First Bank, Second Bank, Third Bank, and Fourth Bank. All of the commercial banks, except First Bank, have used all of their excess reserves to issue loans to consumers and businesses. First Bank is holding $288,000 in excess reserves.

Suppose First Bank loans all of its excess reserves to a customer to buy a custom-built house. The home builder deposits all of the money received for building the house into Second Bank, which then lends all its excess reserves to a customer to buy machines for her factory. The machine manufacturer deposits all of the money received into Third Bank, which lends all its excess reserves to a clothing maker to buy textiles. The textile manufacturer deposits all of the money received into Fourth Bank, which lends all its excess reserves to a rancher to buy more cattle. By how much have these rounds of lending increased the money supply in Islandia?

Instructions: Round your answer to 2 decimal places.

taupecoyote41

Explain the following statement whether true or false.

1- Assume that when $80,000 cash enters the banking system, the money supply ultimately increases by $320,000. Assume also that all banks do not hold excess reserves and that the entire money supply consists of demand deposits. Then the total legal reserves for all banks will amount to $40,000, and total loans and investments for all banks will be equal to $ 280,000.

2- Banks cannot affect or contribute to changes in the money supply if they were required to hold all reserve deposits.

3-Nowadays, a credit card is similar to a check, in money definition, according to macroeconomics.

silverlion359

ECON 2000 Chapter 19: Notes on The Financial System

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