03/12/16     

UNIT 4: FED & The Creation of Money

Reserve requirements

-fed requires banks to always have same money readily available to meet consumers demands for cash

-the amount set by fed, is requires reserve ratio

- the most common required reserve ratio = 10%

-the required reserve ratio is the 5 of demand deposits (checking account balances that must not be loaned out

Banks Create money by loaning out fractions of deposits that people put into the bank (as shown in the above photo.)

-by using a balance sheet or a T- account which shows liabilities and assets, potential loans can be calculated.

Bank Liabilities (the right side of the T-account sheet)

-demand deposits (DD) or check able deposits (CD):
    -cash deposits from the public
    -they are liabilities because they belong to the depositors


-owners equity: the values of stocks held by the public ownership of banks shares

Bank assets (the left side op=f the T- account sheet)

-Required Reserves (RR): percentages of demand deposits that must be held in the vault so that some depositors have access to their money


-Excess Reserves (ER): source of new loans

-Securities (bonds)- can be purchased by a bank from the Federal Reserve. These bonds can be purchased from the banks and turned into cash and immediately becomes available as excess reserves