Money creation/monetary policy chapter 11
Assets (own)
-Cash -reserves -loans -securities -other
Liabilities(owe)
-Checkable deposits -Time/savings deposits -net worth -Capital Required reserve 10%
The Fed purchases 1 million of US government securities from first bank. The required reserve ratio is 10%, the Currensy drain is zero, and banks loan all excess reserves. By how much does first banks excess reserves increase?
1 million or $1,000,000
If required reserve equals 5%
Deposit multiplier 1/.05 =20
If required reserve equals 10%
Deposit multiplier 1/.10=10
If required reserve equals 20%
Deposit multiplier 1/.20=5
Bank owes fed decrease the reserve
Fed Owes bank increase reserve
Inflation
If GDP is greater than GDP potential equals inflation
Recession
If GDP potential> GDP On employment/recession
Solution
Increase GDP until GDP equals GDP potential
A bank report reserves of 200,000 equipment of 200,000 loans of 1 million deposits of 1 million and owners equity of 400,000 if the required reserve ratio is 10% the bankers required reserves are
$100,000
If the deposit multiplier is 10 then a ----- in reserves leads to a $200,000 increase in deposits
$20,000
Suppose that the citizens First Bank has excess reserves of $75 and that the required reserve ratio is 25% using the deposit multiplier what will be the total change in deposits that the banking system can create
$300
The Fed is made up of
-12 district banks -board of governors -7 members -14 year terms -Chairman of the board (1 of the seven members) -4 year term -current Janet Yellen
Federal open market committee(FOMC)
-12 members -7 board of governors -5 presidents of district banks -including the New York president who is one of the five
Three Interest Rates
-Discount rate (privilege not a right) -Federal funds rate(interest rate Fed charges commercial banks on loans) -prime rate(Best freight charge to their best corporate customers)
Financial institutions that are public
-FDIC Federal deposit insurance Corporation which insures the deposit or not the deposit -treasury -Federal reserve system(FED)
M2 Near money
-M1 + savings deposit + Time deposit + money market mutual fund(MMMF)
M1
-coins -currency (coins and currency make up about about 50%) -checkable deposits (check about deposits make up about 50%)
Financial institutions that are private
-savings and loans -commercial banks -Credit unions
Monetary policy
-sell securities in open-market -increase discount rate -increase required reserve ratio
If required reserve equals 25%
1/.25=4
The commerce bank of Pennsylvania has total deposits of 100,000 and total reserves of 100,000. The reserve ratio is 20%. The banks excess reserves to loan out are
100,000 / 5 (1/.20=5) = 20,000 100,000-20,000= 80,000
The federal reserve system is organized into
12 districts, dividing up the United States
200,000 increase in deposits leads to a
20,000 in reserves if the deposit multiplier is 10
The voting members of the Federal open market committee consists of the
7 board of governor members and 5 federal reserve bank presidents
Deposit creation
A=L+NW
Legal reserves equal
Actual reserves
Government securities, checkable deposits, capital owed to stockholders, equipment, loans, cash, and reserves at the Fed are items that appear on a bankers balance sheet.
Assets include government securities, equipment, loans, cash, and reserves at the fed.
Required reserves equal
Checkable deposits * reserved required
Solution
Decrease GDP until GDP equals GDP potential
Thanks loan out less if
Decreased required reserve ratio
A commercial bank can loan out only its
Excess reserves
The Federal Reserve system
Is a bankers Bank
The amount of loans a bank can make is limited by
It's excess reserves
Excess reserves equal
Legal reserves subtracted required reserves
The Fed is a central bank and as such
Provides banking services to banks but not individuals
The largest component of bank deposits is
Savings and time deposits
If Rob deposits 300 and currency into his savings account at Bank of America
The value of M1 decreases