Macroeconomics Ch 15: Money Creation

a banking system in which banks hold only a fraction of deposits as reserves

Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

•Banks create money through lending •banks are subject to "panics"

•monetary system originates from london goldsmiths of 1650-1700 Goldsmiths: •Stored gold and gave a receipt •Receipts used as money by public •Made loans by issuing receipts

Statements of all of a firms assets and claims on those assets •assets = liabilities + net worth

•a receipt, became a substitute for gold and silver currency, easier to exchange •money

the dollar amount of reserves a bank is obligated by regulation to hold • Required reserves = deposits x reserve ratio

Keep 100% of their deposits on hand at all times

deposits that banks have received but have not loaned out

the fraction of deposits that banks hold as reserves - either in cash or at the Fed

within statutory limits (set by Congress).

lending abilities of commercial banks

reserves greater than the required amounts •excess reserves = reserves - requires reserves

1) profits (make loans and buy bonds to earn interest) 2) liquidity (bank safety lies in holding liquid assets, such as cash and excess reserves)

1/required reserve ratio

the use of borrowed money to magnify profits and losses •modern banks use lots of leverage •this, small losses can drive banks into insolvency

Capital requirements

Economic resources (things of value) owned by a firm.

The claims of non-owners

The claims of owners

When depositors - people with bank notes - withdraw their deposits simultaneously due to concerns about the bank's solvency

make loans.

loans are repaid.

1. Creating a bank 2. Acquiring property and equipment 3. Accepting deposits 4. Depositing reserves in a federal reserve bank 5. Clearing a check drawn against the bank 6. Granting a loan 7. Buying government securities

the interest rate at which banks make overnight loans to one another

Less; more