Explain how banks create loans and how this process is impacted by the reserve requirement and excess reserves. Then, create a scenario that demonstrates how banks create money when they issue loans, being sure to include an initial deposit amount, a reserve requirement ratio, an excess reserve amount, and how much money can be created from a single transaction.

What will be an ideal response?


Answers will vary but should demonstrate understanding of how banks create money through the issuance of loans and how the amount banks have to loan is limited by the reserve requirement and the bank’s excess reserves. For example, a bank might receive an initial deposit of $50,000. If it has a reserve requirement ratio of 10 percent, the bank must keep $5,000 in its reserves, leaving the bank with $45,000 in excess reserves. If the bank loans those excess reserves to a single borrower and that borrower deposits the money in a new bank account, the transaction has created $45,000 in checkable deposits.

Economics

You might also like to view...

Refer to Figure 11-11. In the short run, if the firm sells fewer than 5,000 picture frames per month

A) it should produce with the scale of operation associated with ATCc. B) it should produce with the scale of operation associated with ATCa. C) it should produce with the scale of operation associated with ATCb. D) it will experience constant returns to scale.

Economics

Which of the following is a major advantage of the sole proprietorship?

a. separation of ownership and control b. limited liability for business debt c. transferability of ownership and firm continuity over time d. ease of start-up e. ease of obtaining financing

Economics

A recessionary gap exists if (actual) Real GDP is __________ Natural Real GDP

A) less than B) greater than C) equal to D) b and c E) none of the above

Economics

The stability of cartel prices is challenged because

A. cartels never exist. B. though they increase profits, they are vulnerable to those that seek to make more profit by breaking the agreements that generated them. C. though they increase profits, they are vulnerable to egalitarian interests. D. they never increase the profitability of their members.

Economics