Download 17.1 How Banks Work

17.1 How Banks Work
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Money Creation, the Federal
Reserve System, and
Monetary Policy
17.1 How Banks Work
17.2 Monetary Policy in the
Short Run
17.3 Monetary Policy in the
Long Run
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
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CONSIDER
 How does the Fed create money?
 Why don’t you demand all the money you can get your
hands on?
 What’s the price of holding money?
 How does the supply of money in the economy affect
your chances of finding a job, your ability to finance a
new car, and the interest rate you pay on credit cards?
 What’s the impact of changes in the money supply on
the economy in the short run and in the long run?
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
Objectives
 Discuss what’s involved in getting a new
bank up and running.
 Describe how the banking system can
expand the money supply by a multiple of
excess reserves.
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
Key Terms
 net worth
 asset
 liability
 balance sheet
 required reserve ratio
 required reserves
 excess reserves
 money multiplier
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
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Operating a Bank
Getting a charter
Bank balance sheet
Reserve accounts
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
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Getting a Charter
Charter—the right to operate
Net worth—assets minus liabilities, also
called owners’ equity
Asset—any physical property or financial
claim owned by the bank
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
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Bank Balance Sheet
Liability—an amount owed
Balance sheet—a financial statement
showing assets, liabilities and net worth at
a given time; assets must equal liabilities
plus net worth, so the statement is in
balance
Assets = Liabilities + Net worth
CONTEMPORARY ECONOMICS
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17.1 How Banks Work
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Reserve Accounts
Required reserve ratio—a Fed regulation
that dictates the minimum fraction of
deposits each bank must keep in reserve
Required reserves—the dollar amount
that must be held in reserve; checkable
deposits multiplied by the required reserve
ratio
Excess reserves—bank reserves in
excess of required reserves
CONTEMPORARY ECONOMICS
© Thomson South-Western
17.1 How Banks Work
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Money Multiplier
 Money multiplier—the multiple by which the
money supply can increase as a result of an
increase in excess reserves in the banking
system
 The Fed makes a move
 Round one
 Round two and beyond
 Reserve requirements and money expansion
 Limitations on the multiplier
CONTEMPORARY ECONOMICS
© Thomson South-Western