TOPICS
- Goldsmith Banking: the
origin of the fractional reserve system of banking
- How Banks Create Money
- The Money Multiplier
OUTCOMES
Recount the story of how
fractional reserves began with goldsmiths.
Explain a "run on a bank" and how
it is related to fractional reserve banking?
Do banks really "create"
money?
Explain the effects of a currency
deposit ($10 bill) in a checking account on the
composition and size of the money supply.
Compute a bank's required and
excess reserves when you are given its balance sheet
figures.
Explain why a commercial bank is
required to maintain a reserve (required reserve) and why
it isn't enough to cover deposits.
Describe what happens to the money
supply when a commercial bank makes a loan or buys
securities. Describe what happens to the money supply
when a loan is repaid or a bank sells its
securities.
Explain what happens to a
commercial bank's reserves and checkable deposits after
it has made a loan.
Describe how a check drawn on one
commercial bank and deposited in another will affect the
reserves and excess reserves in each bank after the check
clears.
Explain how it is possible for the
banking system to create an amount of money that is a
multiple of its excess reserves when no single bank ever
creates money greater than its excess
reserves.
Compute the size of the monetary
multiplier and the money creating potential of the
banking system when provided with appropriate
data.
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