Understanding Money and Banking: Federal Reserve, Monetary Policy, and Money Creation

1. G. Money and Banking and How Banks Create Money 1. The process of monetary creation...an application 2. The application of the monetary multiplier H. The Federal Reserve Banks and Monetary Policy 1. Effect which open market operations have on money supply 2. Effect which changes in reserve requirements have on money supply 3. Effect which changes in the discount rate have on money supply 4. Effect which changes in the money supply have on aggregate demand and equilibrium GDP 5. Strengths, shortcomings, and problems with monetary policy

2. ORIGINAL $100,000 PLUS CREATED 80,000 PLUS CREATED 64,000 PLUS CREATED 51,200

3. ORIGINAL $100,000 PLUS ULTIMATELY, CREATED 80,000 HOW MUCH PLUS COULD BE CREATED 64,000 CREATED? PLUS CREATED 51,200 (OR WHAT PLUS WOULD THE ? PLUS AMOUNTS IN THE BOX ADD ? UP TO?) . . PLUS 1 CENT CREATED

4. ORIGINAL $100,000 PLUS ULTIMATELY, 4 CREATED 80,000 HOW MUCH PLUS COULD BE 0 CREATED 64,000 CREATED? PLUS 0 CREATED 51,200 (OR WHAT PLUS WOULD THE 0 ? PLUS AMOUNTS IN THE BOX ADD 0 ? UP TO?) . 0 . PLUS 1 CENT CREATED

5. MONETARY MULTIPLIER--Maximum checking deposit expansion which can result from a given amount of excess reserves is a multiple of that given amount of excess reserves. That multiple is the monetary multiplier. It is equal to 1 / R where R is the required reserve ratio.

6. MONETARY MULTIPLIER--Maximum checking deposit expansion which can result from a given amount of excess reserves is a multiple of that given amount of excess reserves. That multiple is the monetary multiplier. It is equal to 1 / R where R is the required reserve ratio. REMEMBER: WE HAVE ASSUMED A 20% RESERVE RATIO.

7. MONETARY MULTIPLIER--Maximum checking deposit expansion which can result from a given amount of excess reserves is a multiple of that given amount of excess reserves. That multiple is the monetary multiplier. It is equal to 1 / R where R is the required reserve ratio. MON. MULT. = 1 / .2

8. MONETARY MULTIPLIER--Maximum checking deposit expansion which can result from a given amount of excess reserves is a multiple of that given amount of excess reserves. That multiple is the monetary multiplier. It is equal to 1 / R where R is the required reserve ratio. MON. MULT. = 1 / .2 = 5

9. MONETARY MULTIPLIER--Maximum checking deposit expansion which can result from a given amount of excess reserves is a multiple of that given amount of excess reserves. That multiple is the monetary multiplier. It is equal to 1 / R where R is the required reserve ratio. MON. MULT. = 1 / .2 = 5

10. A bank can loan out its excess $100,000 $100,000 reserves!!!!!!!!!!!! $100,000 BANK A ASSETS LIABILITIES CHECKING DEPOSITS VAULT CASH REQUIRED 20,000 100,000 EXCESS 80,000 MONETARY MULTIPLIER X ORIGINAL EXCESS GIVES US ULTIMATE POSSIBLE EXPANSION WHICH CAN RESULT FROM THAT EXCESS.

11. A bank can loan out its excess $100,000 $100,000 reserves!!!!!!!!!!!! $100,000 BANK A ASSETS LIABILITIES CHECKING DEPOSITS VAULT CASH REQUIRED 20,000 100,000 EXCESS 80,000 MONETARY MULTIPLIER X ORIGINAL EXCESS GIVES US ULTIMATE POSSIBLE EXPANSION WHICH CAN RESULT FROM THAT EXCESS. 5 X 80,000 = 400,000