Download Chapter 19: Money Creation

Chapter 25: Money Creation
LEARNING OBJECTIVES
The steps to achieve the learning objectives include reading sections from your textbook and the
“causation chain game,” which is available directly on the Tucker web site. The steps also include
references to “Ask the Instructor Video Clips,” the “Graphing Workshop” available through
CourseMate on the Tucker website.
#1 - Explain the role banks play in the creation of the money process.
Step 1
Read the sections in your textbook titled “Money Creation Begins,” “How a Single Bank
Creates Money,” and “Multiplier Expansion of Money by the Banking System.”
Step 2
Listen to the “Ask the Instructor Video Clip” titled “How Do You Calculate a Bank’s
Excess Reserves?” You will learn the amount a bank can lend depends on it excess
reserves.
Step 3
Listen to the “Ask the Instructor Video Clip” titled “How Are Banks Different from
Other Businesses?” You will learn that banks are unique because they are regulated
corporations that create money by making loans.
The Result
Following these steps, you have learned that banks create new money (checkable
deposits) by making loans from their excess reserves. When these loans are deposited in
one bank after another throughout the banking system, a money multiplier occurs because
the total increase in money supply exceeds the initial increase in excess reserves.
#2 - Understand how the Fed uses its tools to change the money supply.
Step 1
Read the section in your textbook titled “How Monetary Policy Creates Money.”
Step 2
Play the “Causation Chains Game” titled “Open Market Operations.”
Step 2
Listen to the “Ask the Instructor Video Clip”* titled “How Does the Fed Influence
Interest Rates?” You will learn how the Fed controls the money supply using its tools:
(1) open market operations, (2) discount rate, and (3) the required reserve ratio.
The Result
Following these steps, you have learned that the Fed’s tools of monetary policy are openmarket operations, the discount rate, and the required reserve ratio. Using open-market
operations, the Fed buys or sells U.S. government securities. The Fed sets the discount
rate, which is the rate the Fed charges banks for lending them funds to meet their required
reserves. The Fed also sets reserve requirement, which is the percentage of their
checkable deposits banks must keep on deposit with the Fed.
#3 - Discuss the shortcomings of monetary policy.
Step 1
Read the section in your textbook titled “Monetary Policy Shortcomings.”
Step 2
Listen to the “Ask the Instructor Video Clip” titled “Can We Count on Monetary and
Fiscal Policy to Smooth Out the Business Cycle?” You will learn that lags before a
policy actually affects the economy are a problem for monetary and fiscal policy.
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The Result
Following these steps, you have learned that monetary policy, like fiscal policy, has its
limitations.
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