TAILIEUCHUNG - Lecture Economics - Chapter 25: Money creation

In this chapter you will learn: Why is there nothing ‘federal’ about the federal funds rate? What are the major tools the Federal Reserve uses to control the supply of money? Exactly how is money created in the economy? That is, how does the money supply increase?. | Chapter 25 Money Creation Key Concepts Summary Practice Quiz Internet Exercises ©2000 South-Western College Publishing * In this chapter, you will learn to solve these economic puzzles: Exactly how is money created in the economy? That is, how does the money supply increase? What are the major tools the Federal Reserve uses to control the supply of money? Why is there nothing ‘federal’ about the federal funds rate? * In the Middle Ages, what was used for Money? Gold was the money of choice in most European nations * Who were the Founders of our Modern-day Banking? Goldsmiths, people who would keep other people’s gold safe for a service charge * What was the first Currency? People would use the receipts they received from goldsmiths as paper money * How did the early Goldsmiths act as the First Banks? Some goldsmiths made loans and received interest for more gold than the actual gold held in their vaults * What is Fractional Reserve Banking? A system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed * What are Required Reserves? The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed * What is a Required Reserve Ratio? The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed * What are Excess Reserves? Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves * Typical Bank - Balance Sheet 1 Assets Liabilities Required Reserves $5 million Checkable Deposits $50 million Excess Reserves 0 Loans $45 million Total $50 million Total $50 million Note: The Fed requires the bank to keep 10% of its checkable deposits in reserve. * What are Total Reserves? Total Reserves = required reserves + excess reserves * Required Reserve Ratio of the Fed Type of Deposit Required Reserve Ratio Checkable deposits 3% 0 - $ million Over $ million .

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