Chapter 15 How Banks and Thrifts Create Money

1
Give me a loan so there will be more DD in the
system.
How Banks Create Money MS MS Currency DD of
Public Banks thru loans Create More DD
2
How Banks and Thrifts Create Money
3
Dennis Rodman deposits 1 with A 10 RR
Rodmans
.10
90 cents
Excess Reserves
RR
Total(Actual) Reserves
One Dollar
One banks loan becomes another banks DD.
PMC M x ER, so 10 x .90 9 TMS PMC9
DD1 10 MS currency DD of Public
4
Rodmans Bank Borrows 1 From The Fed 10 RR
Fed
Rodmans Bank
0
One Dollar
RR
Excess Reserves
Total(Actual) Reserves
One Dollar
PMC M x ER, so 10 x 1 10 TMS 10
PMC10 MS currency DD of public
5
BALANCE SHEET OF A COMMERCIAL BANK
ASSETS cash LIABILITIESDD The
cash is property of the bank liable,
DDs are owed to depositors Cash
100,000 DD 100,000
The Goldsmiths Fractional Reserve Banking
System Money Creation Reserves The current 10
RR is kept in a banks vault or in a Fed
vault. Bank Panics and Regulation
6
Money Creation
7
1,000 DD by Ann MSCurrencyDD of Public












New Deposits New Reserves DD
New Required Reserves RR10
DD Created By New Loans equal to new ER















Bank







Dog that can YoYo

1,000.00
900.00
100.00
A








900.00

One year all u can eat hot wings at Hooters






B
90.00
900.00
810.00













81.00
C
810.00







729.00

729.00 for a cat bodyguard





72.90
729.00
D
656.10















PMC









9,000.00
PMC ER900 x M10


Smoking cat






Anns DD PMC TMS






1,000.00 9,000.00 10,000.00




MS grows by multiple of 10








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(No Transcript)
9
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
owe
ASSETS
LIABILITIES NET WORTH
own
10
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
owe
ASSETS
own
LIABILITIES NET WORTH
Cash 250,000
Capital Stock 250,000
Deposit Added to Vault Cash
11
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
ASSETS
LIABILITIES NET WORTH
owe
own
Cash 250,000
Capital Stock 250,000
12
Birth OF A COMMERCIAL BANK In Lovelady, Texas
ASSETS
LIABILITIES NET WORTH
own
owe
Cash 10,000 Property 240,000
Capital Stock 250,000
Lovelady Bank
13
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Cash 10,000 Property 240,000
Capital Stock 250,000
250,000
250,000
14
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Was 10,000
Cash 110,000 Property 240,000
DD 100,000 Capital Stock 250,000
15
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Cash 110,000 Property 240,000
DD 100,000 Capital Stock 250,000
Was 10,000
350,000
350,000
16
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES NET WORTH
Cash 110,000 Property 240,000
DD 100,000 Capital Stock 250,000
350,000
350,000
17
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES NET WORTH
was 110,000
Cash 60,000 Property 240,000
DD 50,000 Capital Stock 250,000
300,000
300,000
18
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
19
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITY and NET WORTH
Cash 60,000 Property 240,000
DD 50,000 Capital Stock 250,000
20
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
LIABILITIES and NET WORTH
ASSETS
Cash 60,000 Loans 50,000 Property
240,000
DD 100,000 Capital Stock 250,000
21
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES AND NET WORTH
Cash 60,000 Loans
0 Property 240,000
DD 50,000 Capital Stock 250,000
22
Joe Bozo
Dallas
Big D
Lovelady Bank
Hateman Bank
(a) Joe Bozo pays Best Buy a 50,000 check
23
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Reserves 10,000 Loans
50,000 Property 240,000
DD 50,000 Capital Stock 250,000
24
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Reserves 10,000 Loans
0 Property 240,000
DD 0 Capital Stock 250,000
25
MULTIPLE DEPOSIT EXPANSION PROCESS RR 20
Paris Hilton
1st 10 357 of the 400
Susie RahRah
Im doing the econ rap.
Ronald McDonald
400.00
P MC in the banking system MxER
Reese Witherspoon
TMS 500.00
26
Ashley Olsen Deposits 1,000 in her bank
RR 25
1,000 New reserves
750 Excess reserves
Ashley Olsens
250 RR
Ashley Olsen deposits 1,000
3,000 PMC thru bank lending
1,000 Initial Deposit
TMS 4,000
27
Fed Buys A 1,000 Bond From Ashleys Bank
New reserves
Ashley Olsens
1,000 Excess Reserves
25 RR
4,000 PMC thru Bank Lending
TMS is 4000
28
NS 31-35 AP Econ MS CurrrencyDD of Public
RRERTR TR-RRER TR-ERRR MXERPMC
PMC(Public)DDTMS PMC(Fed)TMS
Excess Reserves prior to new currency deposit
(DD) 0 Britney Spears deposits in the banking
system 40 billion Legal Reserve Requirement
RR 20
31. The 40 billion deposit of Currency into DD
will result in MS staying at (8/40/160)
billion. 32. The 40 billion deposit of currency
into checking accounts will create ER of
(20/32/40) billion. 33. The Potential Money
Creation of the banking system through
loans is (40/160/200) bil. The Potential TMS
all DD of the public could be as much as
(40/160/200) 34. The RR applies to checkable
deposits at (banks/SLs/ credit unions/ all
depository institutions). 35. If the Duck
National Bank has ER of 6,000 DD of 100,000
what is the size of the banks TR if the RR
is 25? (25,000/75,000/31,000)
RR(____)ER(___)TR(____)
25,000
31,000
6,000
29
NS 36-45 MS CurrrencyDD of Public
36. A stranger deposits 1,000 in a bank that
has a RR of 10. The maximum possible
change in the dollar value of the local banks
loans would be ______. PMCM X ER in the
banking system is _____. Potential TMS
could become as high as _______. 37. Suppose a
commercial bank has DD of 100,000 and the RR is
10. If the banks RR ER are equal, then
its TR are (10,000/20,000/30,000). 38. Total
Reserves (minus/plus) RR ER. 39. Suppose the
Thunderduck Bank has DD of 500,000 the RR is
10. If the institution has ER of 4,000
then its TR are (46,000/54,000/4,000). 40. If
ER in a bank are 4,000, DD are 40,000, the RR
is 10, then TR are (4,000/8,000). 41.
The main purpose of the RR is to (have funds for
emergency withdrawals/ influence the
lending ability of commercial banks). 42.
If I write you a check for 1 we both have our
checking accts at the Poorman Bank, the
banks balance sheet will (increase/decrease/be
unchanged). 43. Banks (create/destroy) money when
they make loans and repaying bank loans
(create/destroy) money. 44. When a bank loan is
repaid the MS is (increased/decreased). 45. The
Fed Funds rate is a loan by one bank (to another
bank/from the Fed).
RRERTR TR-RRER TR-ERRR MXERPMC
PMC(Public)DDTMS PMC(Fed)TMS
900
9,000
10,000
30
NS 46-47 MS CurrrencyDD of Public
RRERTR TR-RRER TR-ERRR MXERPMC
PMC(Public)DDTMS PMC(Fed)TMS
46. If the RR was lowered say, from 50 to 10,
the size of the monetary multiplier MM
would (increase/decrease).
Leakages(limitations) of the Money
Creating Process 1. Cash leakages
taking part of loan in cash
2. ER (banks dont loan it or we dont borrow
47. If borrowers take a portion of their loans as
cash, the maximum amount by which the
banking system increases the MS by lending will
(increase/decrease).
31
Money Supply DD Currency of the Public

PMC
PMC TMS
ER Loans Crea. In
Potential 10010 RR 1st Bank 1st
Bank System Total MS Banks/Public DD
100 90 90 900 1,000
Fed /Public/Banks DD100 90
90 900 1,000
Fed buys bonds from public who put the money
in their DD Banks/Fed Fed Loan100 100
100 1,000 1,000 or sells bonds
to Fed PMC
PMC TMS ER
Loans Crea. In Potential 100
20 RR 1st Bank 1st Bank System
Total MS Banks/Public DD 100 80 80
400 500 Fed/Public/Banks DD
100 80 80 400 500
Fed buys bonds from public who put the money
in their DD Banks/Fed Fed Loan100
100 100 500 500
or sells bonds to Fed
Short Run
Long Run
32
Mischa Barton Deposits 1,000 In Her Bank RR is
20
Mischa Bartons
New reserves
800 Excess Reserves
200 RR
Mischa from the O.C. member of the public
1000 Initial Deposit
4000 PMC thru Bank Lending
TMS is 5,000
33
Fed buys a 1,000 Bond from Mischas Bank
New reserves
20 RR
Fed
1,000 Excess Reserves
Mischa Bartons
5,000 PMC thru Bank System Lending
TMS is 5000
34
Jennifer Garner Deposits 1 with A 20 RR
Jen Garners
.20
80 cents
Excess Reserves
RR
Total(Actual) Reserves
One Dollar
PMC M x ER, so 5 x .80 4 TMS PMC4
DD1 5 MS Currency DD of Public
35
Jennifers Bank Borrows 1 From The Fed 20 RR
Fed
Jen Garners
0
One Dollar
RR
Excess Reserves
Total(Actual) Reserves
One Dollar
PMC M x ER, so 5 x 1 5 TMS 5 PMC
5 MS currency DD of Public
36
Money Creation Practice Review
37
1,000 DD by Katy MSCurrencyDD of Public

Duck that can dance












New Deposits New Reserves DD
New Required Reserves RR50
DD Created By New Loans equal to new ER





Dance Lessons w. Laura Bush










Bank








5,000.00
2,500.00
2,500.00
A







2,500.00







B
1,250.00
2,500.00
1,250.00






Hunting with Dick Cheney







625.00
C
1,250.00







625.00






312.50
625.00
D
312.50






Prom Dance lessons with N. Dynamite

















5,000.00

PMC


PMC ER2,500 x M2









Katys DD PMC TMS



5,000.00 5,000.00 10,000.00

MS grows by multiple of 2








38
Money Creation Formulas Public
Student deposits 1.00 in a bank 1. RRERTR
TRRRER TRERRR 2. ER x MM PMC 3. PMC
1st DD TMS
MS Currency DD of public
Public
Fed

• No Public Fed gives 1.00 loan to a bank
• RRERTR TR-RRER TR-ERRR
• ER x MM PMC TMS

39
Banks and the Fed
RRERTR TR-RRER TR-ERRR MxERPMC
PMC(Public)1st DDTMS PMC(Fed)TMS
MS Currency DD of
Public Money borrowed from the Fed or gained
thru bond sales is ER can be loaned out 9. RR
is 25 Econ Bank borrows 25,000 from the Fed
its ER are increased by ______. Potential Money
Creation in the system is _______. Potential TMS
is _______. 10. RR is 50 a bank borrows
20,000 from the Fed this one banks ER are
increased by _____. Potential Money Creation
in the system is ______. Potential TMS is
______ 11. RR is 20 the Duck Bank sells 10 M
of bonds to the Fed Duck Banks ER are
increased by ______mil. PMC in the system is
___________. TMS is __________. 12. RR is 20
Fed buys 50,000 of securities from Keynes Bank.
Its ER are increased by ___________.
Potential Money Creation in the banking system
is ______________. Potential TMS is
______________. 13. 25 RR Fed buys 400
million of bonds from the Friar Bank. This one
banks ER are increased by _______million. 14.
RR is 50 the Fed sells 200 million of bonds to
a bank its ER are (increased/decreased) by
_______. Potential Money Creation in the
banking system is (increased/decreased) by
________. 15. RR is 10 a bank borrows 10
million from the Fed this one banks ER are
increased by _______ million. PMC in the banking
system is _______million. Potential TMS is
_______million.
100,000
100,000
25,000
40,000
40,000
20,000
10
50 million
50 million
50,000
250,000
250,000
400
200 M
400 M
10
100
100
40
Banks and the Public
RRERTR TR-RRER TR-ERRR M x ERPMC
PMC(Public)1st DDTMS PMC(Fed)TMS Banks
Public (all DD of Public are subject to the RR
rest is ER can be loaned out) 1. No ER RR is
20 DD of 10 M is made in the Thunder Bank. MS
is ___million. ER increase by ___million.
Potential Money Creation in the banking
system is _____M. Potential TMS is
____million. 2. There are no ER RR is 25
16,000 is deposited in the Duck Bank. MS is
_______. This one bank can increase its loans by
a maximum of _______. Potential Money
Creation in the banking system is _______.
Potential Total Money Supply could be
__________. 3. Econ Bank has ER of 5,000 DD
are 100,000 RR is 25. TR are _______. 4. DD
are 10,000 ER are 1,000 TR are 3,000 RR are
_________. TR-ERRR. 5. Nomics Bank has ER of
10,000 DD of 100,000 RR of 40. TR are
_________. With ER above, Potential Money
Creation in the banking system is __________. 6.
Friar Bank has DD of 100,000 RR is 20 RR ER
are equal. TR are ________. 7. If ER in a bank
are 10,000 DD are 200,000, the RR are 10.
TR are _______. 8. No ER RR is 25. DD of
100,000 is made. MS is _______. This single
bank can increase its loans by ______. PMC in
the system is ________. TMS is _________.
MS currency DD of Public
10
8
50
40
16,000
48,000
12,000
64,000
30,000
2,000
50,000
25,000
40,000
30,000
100,000
75,000
300,000
400,000
41
Fed and the Public
RRERTR TR-RRER TR-ERRR MxERPMC
PMC(Public)1st DDTMS PMC(Fed)TMS
MS Currency DD of the
Public When Fed buys securities from Public,
they will put the money in their DD 16. RR is
50 Fed buys 10 M of bonds from the Public. MS
is increased by _______. ER are increased by
____. PMC in the system is _______. Potential TMS
is _______. 17. RR is 25 Fed buys 100 M of
bonds from the Public. The MS is increased
_______. ER are increased by ______. PMC in the
system is _______. Potential TMS is ________. 18.
RR is 50 Fed sells 200 M of bonds to the
Public. The MS is (incr/decr) by __________.
ER are (incr/decr) by _________. PMC in the
banking system is (increased/decreased) by
_______. Potential TMS is (incr/decr) by
__________. 19. RR is 20 Fed buys 5 million of
securities from the Public. The MS is
increased by _______. ER are increased by
_______. Potential Money Creation in the
banking system is _______. Potential TMS is
_________. 20. RR is 10 Fed buys 50 million of
bonds from the Public. The MS is increased by
_______. ER are increased by _______. PMC in the
banking system is __________. Potential Total
Money Supply is __________.
10 M
20 M
5 M
10 M
100 M
75 M
300 M
400 M
100 M
200 M
400 M
200 M
5 M
4 M
20 M
25 M
50 M
45 M
450 M
500 M
42
Practice Money Quiz MSCurr. DD of
Public RRERTR TR-RRER TR-ERRR MxERPMC
PMC(Public)1stDDTMS PMC(Fed)TMS 1. The
Flores Bank with no ER borrows 100,000 from
the Fed. With a RR of 50 the Flores Bank can
increase its loans by a maximum of __________.
PMC in the banking system is __________.
Potential TMS is ______________. 2. The Clear
Bank has DD of 10,000 RR is 10 RR ER are
equal. TR are _______. 3. RR is 20 Fed buys
50,000 of securities from the public C.
Hovitz PMC in the banking system is
__________. Potential TMS is ____________. 4. RR
is 40 Farrell Bank borrows 1 million from the
Fed. This bank can increase its loans by a
maximum of _______ __. PMC is __________. TMS is
__________. 5. RR is 10 there are no ER
10,000 is deposited in the Merkel Bank. This
bank can increase its loans by a maximum of
__________. Possible Money Creation in the
banking system is ___________. Potential TMs is
_____________. 6. There are no ER in the Roberts
Bank. Nicole now deposits 10.00. With a RR of
20, PMC in the system is __________. Potential
TMS is ___________. 7. The Daniel Bank has a RR
of 50 the Fed buys 50 million of bonds from
this bank. PMC in the system is __________.
Potential TMS is __________. 8. Rau Bank has ER
of 50,000 DD of 100,000, a RR of 20. TR are
________. 9. RR is 40 the Schipper Bank borrows
10 million from the Fed. This banks ER are
increased by _________. PMC is __________.
Potential TMS is ___________. 10. RR is 10
Edwards Bank borrows 5 from the Fed the Edwards
Banks ER are increased by _______. PMC is
__________. Potential TMS is __________.
Commercial Banks Fed Public
100,000
200,000
200,000
2,000
200,000
250,000
1 million
2.5 M
2.5 mil.
9,000
100,000
90,000
40.00
50.00
100 M
100 M
70,000
25 M
10 M
25 M
5.00
50.00
50.00
43
Money Quiz 1 MS Currency DD of
Public RRERTR TR-RRER TRERRR MxERPMC
PMC(Public)1st DDPMC PMC(Fed)PMC 1. RR
is 25 the Suchta Bank has no ER. Suzy
deposits(DD) 100,000 there. This bank can
increase its loans by a maximum of ______. PMC is
______. TMS is _______. 2. RR is 50 the
Brockman Bank borrows 100,000 from the Fed. This
one bank can increase its loans by a maximum
of ________. PMC is _______. TMS is _________. 3.
RR is 25 Fed buys 100,000 of securities from
the public W. Patterson. Potential Money
Creation in the system is ________. Potential TMS
is _________. 4. The Richa Bank has DD of
200,000 RR is 10 RR ER are equal. TR are
_______. 5. The Mosmeyer Bank, with no ER,
borrows 200,000 from the Fed. With a RR of 10,
this bank can increase its loans by _________.
PMC in the system is __________. 6. RR are 20
the Norwood Bank borrows 1 from the Fed this
bank can increase its loans by a maximum of
_________. PMC in the banking system is
__________. 7. RR is 50 the Fitzharis Bank
borrows 1 million from the Fed this banks ER
are increased by _______. PMC in the system is
__________. TMS is __________. 8. The Meehan Bank
has ER of 20,000 DD of 200,000, a RR of 10.
TR are ______. 9. RR is 25 Fed buys 100
million of bonds from the Mendenhal Bank.
Potential Money creation in the banking system
is ________. Potential TMS is ____________. 10.
There are no ER in the Sweeney Bank. Nick
deposits 2.50. With RR of 20, PMC in the
banking system is ____________. Potential TMS is
_____________.
Banks Fed
Public
100,000
300,000
75,000
400,000
100,000
200,000
200,000
300,000
400,000
40,000
200,000
2 million
1.00
5.00
2 million
1 mil.
2 million
40,000
400 mil.
400 million
10.00
12.50
44
Money Quiz 2 MS Curr. DD of Public
RRERTR TR-RRER TR-ERRR MxERPMCPMC(Public
)1st DDTMS PMC(Fed)TMS 1. RR is 5
there are no ER in the Flores Bank. LuLu
depositsDD 1.00 there. This one bank can
increase its loans by a maximum of _______. 2.
RR is 25 the Roberts Bank borrows 1 million
from the Fed. This one bank can increase its
loans by a maximum of ____________. 3. RR is 50
the Fed buys 100,000 of securities from the
public R.Edwards. Potential Money Creation
in the banking system is ____________. 4. The
Brockman Bank has DD of 400,000 RR is 10 RR
ER are equal. TR are ____________. 5. The
Schipper Bank , with no ER, borrows 500,000 from
the Fed. With a RR of 10, how much can this
single bank increase its loans? ____________ 6.
RR are 20 the Fed buys 25,000 of securities
from the public E.Sweeney. Potential Money
Creation in the banking system is
____________. 7. RR is 20 the Hovitz-Sorry Bank
borrows 1 million from the Fed. This single
banks ER are increased by ____________. 8. RR
is 25 Fed buys 200 million of securities from
the public Tony Rau. Potential Total Money
SupplyTMS could be as much as
_______________. 9. The RR is 25 the Fed buys
10 million of bonds from the Daniel Bank.
Potential Money Creation in the banking system
could be ____________. 10. There are no excess
reserves in the Flores Bank. With RR of 50,
Angela deposits DD 50.00 there. Potential
Money Creation in the system is _________.
Commercial Banks Fed Public
.95
1 million
100,000
80,000
500,000
100,000
1 million
800 million
40 million
50.00
45
Additional Practice on Money Creation
RRERTR TR-RRER TR-ERRR MxERPMC
PMCPublic1st DDTMS PMCFed TMS
1. If the RR is 40 and the Fed buys 100 M of
bonds from the public Kevin, then the MS is
increased by _______. ER are increased by
______. PMC is _______. TMS would be ______. 2.
RR is 50 and the Fitzharris Bank borrows 100 M
from the Fed. As a result, RR are increased by
______. ER is increased by _______. PMC and
TMS is increased by ________. 3. Mosmeyer bank
has DD of 400,000 and the RR is 25. If RR
and ER are equal, then TR are _______. 4. The
Patterson Bank has ER of 60,000 DD is
200,000. If the RR is 20, TR are
_________. 5. RR is 20 the Fed buys 50
million of bonds from the public Petra. The
MS is increased by _______. ER are increased
by _______. PMC is _______. TMS would be
_________.
100 M
150 M
250 M
60 M
0
100 M
200 M
200,000
100,000
50 M
200 M
250 M
40 M
Banks Public Fed
46
The End
47

• Money Creation Problems from the 2005 Macro MC
  Exam
• (87) 40. Under a fractional reserve banking
  system, banks are required to
• a. keep part of their demand deposits as
  reserves
• b. expand the money supply when requested by
  the central bank
• c. insure their deposits against losses and
  bank runs
• d. pay a fraction of their interest income in
  taxes
• e. charge the same interest rate on all their
  loans
• (72) 41. If a commercial bank has no ER and the
  RR is 10, what is the value of
• new loans this single bank can issue
  if a new customer deposits 10,000?
• a. 100,000 b. 90,333 c. 10,000
  d. 9,000 e. 1,000
• Assets Liabilities
• Total Reserves 15,000 Demand Deposits
  100,000
• (37) 42. A commercial bank is facing the
  conditions given above. If the RR is 12
• and the bank does not sell any of its
  securities, the maximum amount of
• additional lending this bank can
  undertake is
• a. 15,000 b. 12,000 c. 3,000 d.
  1,800 e. 0

This bank would have to keep 12,000 of their
100,000 in RR. With TR of 15,000, they have
3,000 in ER to loan.
They could increase MS by 5 M, but they are
keeping some in ER, so MS will increase by less
than 5 million.