How do banks "create" money?
- by lending out deposits.
- by lending out deposits.
Where do the loans come from?
- from deposits who take cash and place it into accounts at the bank.
How are the amounts of potential loans calculated?
- by using a balance sheet or a T-account.
Bank Liabilities (the right side of the T-Account Sheet):
#1 = Demand Deposits (DD)/ Checkable Deposits (CD):
- cash deposits from the public.
- they are a liability because they belong to the depositors and can be withdrawn by them.
DD = RR + ER
#2= Owners Equity:
- the values of stocks held by the public ownership of bank shares.
Key Concept for AP concerning Liabilities:
- from deposits who take cash and place it into accounts at the bank.
How are the amounts of potential loans calculated?
- by using a balance sheet or a T-account.
Bank Liabilities (the right side of the T-Account Sheet):
#1 = Demand Deposits (DD)/ Checkable Deposits (CD):
- cash deposits from the public.
- they are a liability because they belong to the depositors and can be withdrawn by them.
DD = RR + ER
#2= Owners Equity:
- the values of stocks held by the public ownership of bank shares.
Key Concept for AP concerning Liabilities:
- If DD comes in from someone's cash holdings, then that DD is already part of the $ supply.
- If the DD comes in from the purchase of bonds (by the FED) then this creates new cash and therefore creates new $ supply.
Bank Assets (the left side of the T-Account Sheet):
#1 = Required Reserves (RR):
- % of demand deposits that must be held in the vault so that some depositors may have access to their money.
- 5%, 10%, 20%
#2 = Excess Reserves (ER):
- the source of new loans.
#3 = Property
#4 = Securities (Bonds):
- bonds that are purchased by the bank or new bonds sold to the bank by the federal reserve.
- these bonds can be purchased from the bank, turned into cash that immediately becomes available as excess reserves.
#5 = Loans
The Monetary Multiplier (also known as): 1/RR
The formula is simple: 1 divided by the reserve requirement (ratio)
Excess Reserves are multiplied by the MultiplierER x Multiplier
- If the DD comes in from the purchase of bonds (by the FED) then this creates new cash and therefore creates new $ supply.
Bank Assets (the left side of the T-Account Sheet):
#1 = Required Reserves (RR):
- % of demand deposits that must be held in the vault so that some depositors may have access to their money.
- 5%, 10%, 20%
#2 = Excess Reserves (ER):
- the source of new loans.
#3 = Property
#4 = Securities (Bonds):
- bonds that are purchased by the bank or new bonds sold to the bank by the federal reserve.
- these bonds can be purchased from the bank, turned into cash that immediately becomes available as excess reserves.
#5 = Loans
The Monetary Multiplier (also known as): 1/RR
The formula is simple: 1 divided by the reserve requirement (ratio)
Excess Reserves are multiplied by the MultiplierER x Multiplier
Remember that when a person deposits cash in a bank, it does not immediately change the money supply, but it does change the composition of the money.
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