Macro Chapter 35

Suppose that the reserve ratio is 20% . If John deposits $500 into his checking account, the banking system creates _______ of checkable deposits through making loans

$2000 the money multiplier of 5 is required, it is computed as 1 divided by the reserve ratio of 20% therefore, the initial deposit of $500 is multiplied by 5 to compute $2500 However, the new amount is $2000 since the initial amount of $500 is not counted

What is the history of the fractional banking system

-the reserves in the bank vault were a fraction of the total money supply -goldsmiths put the paper receipts into circulation by making loans -goldsmiths issued paper receipts in excess of the amount of gold held -the gold receipts were accepted as a medium of exchange -traders would deposit their gold with goldsmiths

What are the main purposes of required reserves

-to help the Fed control the lending ability of commercial banks, -to facilitate the collection or "clearing" of checks, -to help the economy avoid business fluctuations, -to prevent the banks from over-extending or under-extending bank credit

Money Multiplier

1/required reserve ratio

T or F: Banks create money solely by selling US govt bonds to the public

False

T or F: commercial banks cannot create money through lending.

False

What term refers to the amount of reserves that a commercial bank must keep that is a percentage of the bank's checkable deposit liabilities?

Reserve Ratio

T or F: Commercial banks can create money by a multiple of its excess reserves

True

T or F: a withdrawal of cash will decrease the bank's checkable deposit liabilities but not change the total supply of money

True

What are the two basic functions of commercial banks?

accepting deposits and making loans

When a bank buys govt securities it will appear on its balance sheet as an _______ called securities

asset

a bank has stock shares of $100000, property assets of $90000, and cash of $10000. If households and businesses decide to deposit $50000 in the bank as checkable deposits, the balance sheet will be

asset-cash=$60000, property assets=$90000, liabilities and net worth-checkable deposits=$50000, ad stock shares=$100000

Reserves deposited by a commercial bank into the Federal Reserve Bank are ______ to the commercial bank and _________ to the Federal Reserve

asset; liabilities

If the founders of a bank have sold $100,000 worth of shares of stock, some to themselves and some to other people, the balance sheet will read

assets(cash)=$100,000 and liabilities and net worth(stock)=$100,000

On a balance sheet, the value of ______ must equal the ______ against those assets

assets; claims

Balance sheet formula

assets=liabilities+net worth

What best summarizes the pursuit of a bank's two conflicting goals?

banks seek to profit through assets that earn high interest but also seek safety through highly liquid assets that earn no interest

An individual ban can safely lend only an amount equal to its excess reserves, but a commercial banking system can lend:

by a multiple of its collective excess reserves

_________ deposit money is destroyed when loans are paid off

checkable

What are the processes of creating a bank

citizens sell equity shares of stock, citizens secure a state or national charter, citizens decide their community needs a bank

A balance sheet of a commercial bank is a statement of assets and ______ on assets, which summarize the financial position of the bank at a certain time

claims

The basic purpose of required reserves is for the Federal Reserve to

control the lending of commercial banks

The lending process is what allows banks to ________.

create money

Checkable deposits are commercial bank _______ that it promises to pay "on demand."

debts

When a deposited check is drawn against another bank, the collection of that check will ________ the reserves and the checkable deposits of the bank from which it was drawn

decrease

A single commercial bank can lend only an amount equal to its _______ reserves

excess

Maximum checkable deposit formula

excess reserves X monetary multiplier

The spending-income multiplier exists because the _________ of one household become the income of another household.

expenditures

The _______ _______ rate is the interest banks change on overnight loans to each other

federal funds

Reserve requirements are less than 100%, which means they are

fractional

A banking system in which only a portion of checkable deposits are backed up by cash in bank vaults or deposits in the central bank is called a __________ _______ banking system

fractional reserve

Banks operating on the basis of ________ are vulnerable to panics or black runs

fractional reserves

Banks operating on the basis of __________ ________ are vulnerable to "panics" or "runs."

fractional reserves

When a bank grants a loan, the assets on its balance sheet will ___ by the amount of the loan.

increase

Deposit ___ stops banks runs by guaranteeing depositors that they will always get their money.

insurance

What anticipates the actions of a bank that its holdings of checkable deposits will grow in the future?

it will send an extra amount of required reserves to the Federal Reserve Bank to enable future lending

By law, all commercial banks and thrift institutions that provide checkable deposits are required to ________

keep an amount of fund equal to a specific percentage of the bank's own deposit liabilities with the federal reserve bank

Non-owner claims against the assets of a bank are called:

liabilities

A higher reserve ratio means a _______ monetary multiplier and ________ creation of checkable deposit money through loans

lower; less

In which ways can a commercial bank create money in an economy

making loans to the public and purchasing govt bonds from the public

The _________ magnifies excess reserves into the larger creation of checkable deposit money

money multiplier

Computing excess reserves

multiply the checkable deposit liabilities by the reserve ratio and then subtracting the difference

The claims of the owners of the firm against the firm's assets are called _______ ______

net worth

A single transaction that deposits money into a bank will increase checkable deposits for the bank, which will result in the bank's liabilities and assuming no loans are dispersed, _______ in the nation's total supply of money

no change

When a bank sells govt bonds to the public, the process

reduces the supply of money

Banks that borrow in the federal funds market do so because they are temporarily short of _______ reserves

required

A smaller ______ means a higher multiplier and greater creation of checkable deposit money through loans

reserve ratio

Which of the following best explain the situation that existed prior to the implementation of deposit insurance.

rumors were usually totally unfounded, depositor's would "run" on their banks to withdraw funds, rumors about banks about to go bankrupt would circulate

In the US, runs on banks are prevented because

the Federal Deposit Insurance Corporation guarantees bank accounts

What agency has the authority to establish and vary the reserve ratio

the Federal Reserve

What about the multiple deposit expansion of money when there is a 20% required reserve ratio and a $100 deposit

the initial deposit of $100 created new reserves of an equal amount, a money multiplier of 5 permits the creation of $400 in new checkable deposits and a $500 increase in the total supply of money, an amount of $80 becomes excess reserves

What deposits are ignored when determining required reserves

time deposits and nonpersonal savings

A bank's excess reserves equals the bank's _______ reserves minus its ________ reserves

total; required

T or F: banks keep a portion of their reserves in their own vaults

true

The two types of claims shown on a balance sheet against assets are liabilities and net ______

worth