Monetary Policy

1. Monetary Policy • Controlling the expansion and/or contraction of the money supply • Influences the cost and availability of credit • Fractional Bank Reserves • Banks only keep a fraction of their deposits as reserves • Legal reserves – coins, currency, and deposits that fulfill reserve requirement • Member banks keep some reserves at Fed district bank • Known as member bank reserves

2. Key Monetary Terms • Liabilities • debts and obligations to others • Assets • Properties • Possessions • Claims on others • Balance sheet • Condensed statement showing all assets and liabilities • Net worth • Excess assets over liabilities

3. How Banks Operate • Organizing a Bank • Obtain a charter • Bank has corporate structure • Investors help build assets • Balance Sheet • Assets – Liabilities = Net Worth • Assets = Liabilities + Net Worth

4. Accepting Deposits • Deposits are reflected in two ways • 1. liability to indicate asset is owed to depositor • 2. asset to show cash is property of bank • Deposits are shown as asset and reserve

5. Making Loans • Bank is free to loan out excess reserves • Once loaned, that money moves to loans, or accounts receivable • Bank makes income on interest charged for loans • Used to pay bills • Then generally paid out as stock dividend

6. Reaching Maturity • Bank will grow and diversify assets and liabilities • Some banks buy bonds and securities • Earn interest • High degree of liquidity • Also offer certificate of deposit and savings accounts • Attempt to maintain a 2%-3% spread on loans • Ensures the bank will make money