KRUGMAN'S

1
Module Banking and Money Creation
25

• KRUGMAN'S
• MACROECONOMICS for AP

Margaret Ray and David Anderson
2
What you will learnin this Module

• The role of banks in the economy
• The reasons for and types of banking regulation
• How banks create money

3
The Monetary Role of Banks

• More than half of the M1 is currency
• The rest is demand deposits

4
What Banks Do

• Financial Intermediary
• Bank Reserves
• T - Account
• Assets Liabilities
• Reserve Ratio
• Required Reserve Ratio

5
The Problem of Bank Runs

• Customer Deposits gt Bank Reserves
• Why does this usually work?
• Bank Run
• Why?
• Bank Failure

6
Bank Regulation

• Deposit Insurance
• FDIC
• Capital Requirements
• Reserve Requirements
• The Discount Window

7
Determining the Money Supply
8
How Banks Create Money
9
Reserves, Bank Deposits, and the Money
Multiplier

• Leaks
• Excess Reserves
• rr reserve ratio
• Loan Expansion Excess Reserves / rr

10
The Money Multiplier in Reality

• Monetary Base
• Money Multiplier
• INSERT FIGURE 25.4