ECON 1051 1nd Edition Lecture 49 Outline of Last Lecture I. Definitions of Money II. How do Banks Create MoneyOutline of Current Lecture I. Story of Multiple Deposit CreationII. Monetary Policy Current LectureI. Story of Multiple Deposit Creation a. Part Ii. You get $1000 as a present from your uncle. You decide to deposit that money into your Bank A. Let’s assume that required reserve ratio is 10 percent. Bank A will keep $100 in a reserve account and loan out the rest.Lakota gets the loan. 1. Note: Required reserve ratio is a fraction of deposits banks cannot use for loans and buying securitiesb. Part IIi. Lakota will use $900 to pay for supplies. John gets paid $900 to deliver coffee beans to Lakota. John banks with a different bank, Bank B. Now Bank B has a new deposit of $900. Bank B will keep $90 in reserve account and loan out the rest of the $810 to Subway. c. Part III i. Subway will buy a new fridge for $810 from Joe. Joes deposits $810 in Bank C. Bank C puts aside $81 in reserve account and loan out $729 to Joe Machens. Joe Machens will deposit $729 in its own Bank D. Now BankD has a new deposit of $729. d. Who has money?i. You have $1000 ii. John has $900 iii. Joe has $810 iv. Someone else has $729 1. Sum is $1000 + $900 + $810 + $729… 2. Sum is $1000*simple deposit multipliera. =$1000*1/rrThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.b. =$1000*1/0.1c. =$1000*10d. =$10,0003. Anytime banks gain liquidity, the system will create multiple deposits. 4. Anytime banks lose liquidity, the system will destroy multiple deposits. a. Public behavior affects money supply in economyb. Federal reserve can play important role in this story or in creating money. Central banks one important function is toregulate currency and money supply. II. Monetary Policy a. How the Fed’s manage nation’s money supply and interest rates b. Conclusions:i. When banks gain reserves, they make new loans, and the money supply expands. c. Fractional Reserve Banking Systemi. A banking system in which banks keep less than 100 percent of deposits as reserves d. Bank run i. A situation in which many depositors simultaneously decide to withdraw money from banke. Bank panici. A situation in which many banks experience runs at the same time 1. A central bank, like the Federal Reserve in the US, can help stop a bank panic by acting as a lender of last
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