Chapter 32: Money Creation

Higher reserve ratios

________ mean lower monetary multipliers and therefore less creation of new checkable- deposit money via loans (and vice versa)

Monetary multiplier

________- Exists because the reserves and deposits lost by one bank become reserves of another bank.

Wahoo

Receiving cash as checkable deposits constitute claims that the depositors have against the assets of the ________ bank and thus are a new liability account.

Reserve ratio

________- The "specified percentage "of checkable- deposit liabilities that a commercial bank must keep as reserves.

excess reserves

A single commercial bank in a multibank banking system can lend only an amount equal to its initial pre- loan ________.

Balance sheet

________- A statement of assets and claims on assets that summarizes the financial position of the bank at a certain time.

commercial bank

When a(n) ________ buys government bonds from the public, new money is created.

Currency itself

________ serves as bank reserves so that the creation of checkable deposit money by banks (via their lending) is limited by the amount of currency reserves that the banks feel obligated, or are required by law, to keep.

federal reserve bank

Transaction 4: Depositing reserves in a(n) ________.

Deposit insurance

________ helps to prevent economic panics.

Federal funds rate

________- Interest paid on banks lending excess reserves to other banks on an overnight basis.

Fractional reserve banking system

Only a portion (fraction) of checkable deposits are backed up by cash in bank vaults or deposits at the central bank

Balance sheet

A statement of assets and claims on assets that summarizes the financial position of the bank at a certain time

Transaction 1

Creating a bank

Vault cash

Cash held by a bank

Transaction 2

Acquiring property + equipment

Transaction 3

Accepting deposits

Transaction 4

Depositing reserves in a federal reserve bank

Required reserves

An amount of funds equal to a specified percentage of the banks own deposit liabilities

Reserve ratio

The "specified percentage" of checkable-deposit liabilities that a commercial bank must keep as reserves

Transaction 5

Clearing a check drawn against the bank

Transaction 6

Granting a loan

Transaction 7

Buying government securities

The selling of government bonds to the public by a commercial bank-like the repayment of a loan

reduces the supply of money

Federal funds rate

Interest paid on banks lending excess reserves to other banks on an overnight basis

Monetary multiplier

Exists because the reserves and deposits lost by one bank become reserves of another bank

Fractional reserve banking system

Only a portion (fraction) of checkable deposits are backed up by cash in bank vaults or deposits at the central bank

Balance sheet

A statement of assets and claims on assets that summarizes the financial position of the bank at a certain time

Vault cash

Cash held by a bank

Required reserves

An amount of funds equal to a specified percentage of the bank’s own deposit liabilities

Reserve ratio

The “specified percentage” of checkable-deposit liabilities that a commercial bank must keep as reserves

Excess reserves

Actual reserves - required reserves

Federal funds rate

Interest paid on banks lending excess reserves to other banks on an overnight basis

Monetary multiplier

Exists because the reserves and deposits lost by one bank become reserves of another bank. It magnifies excess reserves into a larger creation of checkable-deposit money.