Fractional Reserve Banking (Unit 4)

fractional reserve banking

when banks hold on to only a small portion of deposits and loans the rest out

reserve requirement ratio

the minimum amount a bank must have in reserves for people that want to withdraw

borrow from other banks holding excess or the Fed

if the bank falls below their required reserves, it can:

federal funds rate

interest rate that banks charge other banks for loans

discount rate

interest rate Fed charges other banks

loans

banks increase MS when they issue

demand deposits

money that’s loaned out ultimately comes back in

1 / reserve ratio

money multiplier

demand deposits

checking accounts

reserves

how much banks have their vaults

required + excess

actual reserves =

excess reserves

amount the bank can loan out

required reserves

percentage of demand deposits banks must hold by law

bank balance sheet

a record of bank’s assets, liabilities, and net worth

reserve requirement ratio

required reserves / demand deposits

excess reserves

when the bank sells its bonds, the money goes into

total change in demand deposits

initial deposits + (change in ER \* money multiplier)

total change in money supply/loans

change in ER \* money multiplier