Chapter 15 How Banks and Thrifts Create Money

1
Give me a loan so there will be more DD in the
system.
How Banks Create Money MS MS Currency DD of
Public Banks thru loans Create More DD
2
How Banks Create Money Objectives Vocabulary
3
How Banks and Thrifts Create Money
4
Dennis Rodman deposits 1 with A 10 RR
Rodmans
.10
90 cents
Excess Reserves
RR
Total (Actual) Reserves
One Dollar
One banks loan becomes another banks DD.
PMC M x ER, so 10 x .90 9 TMS PMC9
DD1 10 MS Currency DD of Public
5
Rodmans Bank Borrows 1 From The Fed 10 RR
Rodmans Bank
Fed
One Dollar
0
Excess Reserves
RR
Total(Actual) Reserves
One Dollar
PMC M x ER, so 10 x 1 10 TMS 10
PMC10 MS Currency DD of Public
6
BALANCE SHEET OF A COMMERCIAL BANK
ASSETS cash LIABILITIESDD The
cash is property of the bank liable,
DDs are owed to depositors Cash
100,000 DD 100,000
The Goldsmiths Fractional Reserve Banking
System Money Creation Reserves The current 10
RR is kept in a banks vault or in a Fed
vault. Bank Panics and Regulation
7
Money Creation
8
1,000 DD by Calli MSCurrencyDD of Public












New Deposits New Reserves DD
New Required Reserves RR10
DD Created By New Loans equal to new ER















Bank







Dog that can YoYo

1,000.00
900.00
100.00
A








900.00

One year all u can eat hot wings at Hooters






B
90.00
900.00
810.00













81.00
C
810.00







729.00

729.00 for a cat bodyguard





72.90
729.00
D
656.10















PMC









9,000.00
PMC ER900 x M10


Smoking cat






Erins DD PMC
TMS






1,000.00 9,000.00 10,000.00




MS grows by multiple of 10








9
1,000 DD by Marie MSCurrencyDD of Public
Hair care for 1 year












New Deposits New Reserves DD
New Required Reserves RR20
DD Created By New Loans equal to new ER















Bank







Purchase of a donkey

1,000.00
800.00
200.00
A
800.00















B
160.00
800.00
640.00













128.00
C
640.00






512.00



Two Monkeys



102.40
512.00
D
409.60






















4,000.00
PMC

PMC ER800 x M5







A chauffeur dog






Maries DD PMC TMS



1,000.00 4,000.00 5,000.00

MS grows by multiple of 5








10
1,000 DD by Emily MSCurrencyDD of Public
Shark to keep in bathtub












New Deposits New Reserves DD
New Required Reserves RR25
DD Created By New Loans equal to new ER















Bank








Prom date w. Linda Blair
1,000.00
250.00
A
750.00








750.00







B
188.00
750.00
562.00
Frog with teeth












140.00
C
562.00







422.00




Teach Stuart Little how to brush his teeth


105.00
422.00
D
317.00














E
237.00
80.00
317.00









Cat with human teeth





3,000.00
PMC ER750 x M4
PMC









Ems DD PMC TMS

1,000.00 3,000.00 4,000.00
MS grows by multiple of 4








11
MS DD Currency of the Public A DD of 10,000
will increase MS by another 40,000(50,000 MS
RR20
MS 10,000 8,000 6,400 24,400
MS is 10,000
4. 2nd Bank lends Sports Shop 6,400.
1. Joe Biker deposits 10,000 in his bank.
RR 20
MS 10,000 8,000 18,000
2. Suzie Rah Rah borrows 8,000
5. Eventually the MS will be 50,000
Joe
3. Suzie pays 8,000 for a new car. GoNow Auto
deposits the in 2nd Bank.
10,00040,00050,000
12
Most Famous Panic Run in Movie History
13
Another Famous Panic Run in Movie History
The children wanted to use their tuppance to
buy bread crumbs to feed the pigeons, instead
of investing it at the bank. When they said,
We want our money, the other depositors
thought it was a bank run. nominated for a
record 13 academy awards - won 6
14
History of Deposit Insurance
In 1934, federal deposit insurance made
its debut at 2,500 to protect the
average familys savings and end the bank runs
that had shut down businesses and contributed
to the Great Depression. Through the
years the coverage rose in 5,000
increments until the 70s when it jumped to
40,000. In 1980, it was raised to 100,000.
15
The Very Early Days Of Banking
Greatest invention since sliced bread
Wow, you mean we can create money out of thin
air.?
There were more claims to gold than there
were ounces of gold.
The fractional banking system began when
someone issued claims for gold that
already belonged to someone else.
Once upon a time there was a gold-smithy who
offered to store peoples gold in his vault. He
issued paper receipts for the gold, and it was
not long before the townsfolk used the paper to
purchase eggs and beer. The smithys paper
receipts first checks became as good as gold.
Our Smithy was not stupid. He said to
himself. I have 2000 ounces of gold stored in my
vault, but in the last year I was never called
upon to pay out more than 100 ounces in a single
day. What harm could it do if I lent out
say, half the gold I now have? Ill still have
more than enough to pay off any depositors that
come in for a withdrawal. No one will know the
difference. I could earn 30 additional ounces of
gold each week. I think Ill do it. The smithy
has invented the Fractional Reserve Banking
System. Advantages of Lending One disadvantage
was the possibility of bank runs 1. Depositors
havent lost money Goldsmiths paid them instead
of other way 2. With the interest you earned you
could give some to depositors. 3. The loans
benefited the community thru loans
16
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
owe
ASSETS
LIABILITIES NET WORTH
own
17
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
owe
ASSETS
own
LIABILITIES NET WORTH
Cash 250,000
Capital Stock 250,000
Deposit Added to Vault Cash
18
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
ASSETS
LIABILITIES NET WORTH
owe
own
Cash 250,000
Capital Stock 250,000
19
Birth OF A COMMERCIAL BANK In Lovelady, Texas
ASSETS
LIABILITIES NET WORTH
own
owe
Cash 10,000 Property 240,000
Capital Stock 250,000
Lovelady Bank
20
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Cash 10,000 Property 240,000
Capital Stock 250,000
250,000
250,000
21
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Was 10,000
Cash 110,000 Property 240,000
DD 100,000 Capital Stock 250,000
22
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Cash 110,000 Property 240,000
DD 100,000 Capital Stock 250,000
Was 10,000
350,000
350,000
23
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES NET WORTH
Cash 110,000 Property 240,000
DD 100,000 Capital Stock 250,000
350,000
350,000
24
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES NET WORTH
was 110,000
Cash 60,000 Property 240,000
DD 50,000 Capital Stock 250,000
300,000
300,000
25
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
26
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITY and NET WORTH
Cash 60,000 Property 240,000
DD 50,000 Capital Stock 250,000
27
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
LIABILITIES and NET WORTH
ASSETS
Cash 60,000 Loans 50,000 Property
240,000
DD 100,000 Capital Stock 250,000
28
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES AND NET WORTH
Cash 60,000 Loans
0 Property 240,000
DD 50,000 Capital Stock 250,000
29
Joe Bozo
Dallas
Big D
Lovelady Bank
Hateman Bank
(a) Joe Bozo pays Best Buy a 50,000 check
30
And What Happens If A Turtle Doesnt Keep Up with
His Mortgage Payments
31
This turtle is subject to foreclosure on his
house.
Here, he has lost his house.
32
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Reserves 10,000 Loans
50,000 Property 240,000
DD 50,000 Capital Stock 250,000
33
FORMATION OF A COMMERCIAL BANK In Lovelady, Texas
Lovelady Bank
ASSETS
LIABILITIES and NET WORTH
Reserves 10,000 Loans
0 Property 240,000
DD 0 Capital Stock 250,000
34
MULTIPLE DEPOSIT EXPANSION PROCESS RR 20
1st 10 357 of the 400
400.00
P MC in the banking system MxER
TMS 500.00
35
THE Money Deposit MULTIPLIER
The MM is the reciprocal of the RR.
Potential money Creation in the Banking
System PMC
MM
36
Ashley Olsen Deposits 1,000 in her bank
RR 25
1,000 New reserves
750 Excess reserves
Ashley Olsens
250 RR
Ashley Olsen deposits 1,000
3,000 PMC thru bank lending
1,000 Initial Deposit
TMS 4,000
37
Fed Buys A 1,000 Bond From Ashleys Bank
New reserves
Ashley Olsens
1,000 Excess Reserves
25 RR
4,000 PMC thru Bank Lending
TMS is 4000
38
NS 31-35 AP Econ MS Currrency DD of Public
RRERTR TR-RRER TR-ERRR MXERPMC
PMC(Public)DDTMS PMC(Fed)TMS
Excess Reserves prior to new currency deposit
(DD) 0 Britney Spears deposits in the banking
system 40 million Legal Reserve Requirement
RR 20
31. The 40 million deposit of Currency into DD
would result in MS staying at (8/40/160)
million. MS composition changed from currency to
DD 32. The 40 million deposit of currency into
checking accounts will create ER of
(20/32/40) million. 33. The Potential Money
Creation of the banking system through
loans is (40/160/200) mil. The Potential TMS
all DD of the public could be as much as
(40/160/200) mil. 34. The RR applies to
checkable deposits at (banks/SLs/ credit
unions/ all depository institutions). 35. If the
Duck National Bank has ER of 6,000 DD of
100,000 what is the size of the banks TR
if the RR is 25? (25,000/75,000/31,000)
RR(____)ER(___)TR(____)
25,000
31,000
6,000
39
NS 36-45 MS CurrrencyDD of Public
36. A stranger deposits 1,000 in a bank that
has a RR of 10. The maximum possible
change in the dollar value of the local banks
loans would be ______. PMCM X ER in the
banking system is _____. Potential TMS
could become as high as _______. 37. Suppose a
commercial bank has DD of 100,000 and the RR is
10. If the banks RR ER are equal, then
its TR are (10,000/20,000/30,000). 38. Total
Reserves (minus/plus) RR ER. 39. Suppose the
Thunderduck Bank has DD of 500,000 the RR is
10. If the institution has ER of 4,000
then its TR are (46,000/54,000/4,000). 40. If
ER in a bank are 4,000, DD are 40,000, the RR
is 10, then TR are (4,000/8,000). 41.
The main purpose of the RR is to (have funds for
emergency withdrawals/ influence the
lending ability of commercial banks). 42.
If I write you a check for 1 we both have our
checking accts at the Poorman Bank, the
banks balance sheet will (increase/decrease/be
unchanged). 43. Banks (create/destroy) money when
they make loans and repaying bank loans
(create/destroy) money. 44. When a bank loan is
repaid the MS is (increased/decreased). 45. The
Fed Funds rate is a loan by one bank (to another
bank/from the Fed).
RRERTR TR-RRER TR-ERRR MXERPMC
PMC(Public)DDTMS PMC(Fed)TMS
900
9,000
10,000
40
NS 46-47 MS CurrrencyDD of Public
RRERTR TR-RRER TR-ERRR MXERPMC
PMC(Public)DDTMS PMC(Fed)TMS
46. If the RR was lowered say, from 50 to 10,
the size of the monetary multiplier MM
would (increase/decrease).
Leakages (limitations) of the Money
Creating Process 1. Cash leakages
taking part of loan in cash
2. ER (banks dont loan it or we dont borrow
47. If borrowers take a portion of their loans as
cash, the maximum amount by which the
banking system increases the MS by lending will
(increase/decrease).
41
Money Supply DD Currency of the Public

PMC
PMC TMS
ER Loans Crea. In
Potential 10010 RR 1st Bank 1st
Bank System Total MS Banks/Public DD
100 90 90 900 1,000
Fed /Public/Banks DD100 90
90 900 1,000
Fed buys bonds from public who put the money
in their DD Banks/Fed Fed Loan100 100
100 1,000 1,000 or sells bonds
to Fed PMC
PMC TMS ER
Loans Crea. In Potential 100
20 RR 1st Bank 1st Bank System
Total MS Banks/Public DD 100 80 80
400 500 Fed/Public/Banks DD
100 80 80 400 500
Fed buys bonds from public who put the money
in their DD Banks/Fed Fed Loan100
100 100 500 500
or sells bonds to Fed
Long Run
Short Run
42
Sanjaya Deposits 1,000 In His Bank RR is 20
Sanjayas
New reserves
800 Excess Reserves
200 RR
Sanjaya member of the public
1000 Initial Deposit
4000 PMC thru Bank Lending
TMS is 5,000
43
Fed buys a 1,000 Bond from Sanjayas Bank
New reserves
20 RR
Fed
1,000 Excess Reserves
Sanjayas
5,000 PMC thru Bank System Lending
TMS is 5000
44
Eva Longoria Deposits 1 with a 20 RR
Eva Longorias
.20
80 cents
Excess Reserves
RR
Total(Actual) Reserves
One Dollar
PMC M x ER, so 5 x .80 4 TMS PMC4
DD1 5 MS Currency DD of Public
45
Evas Bank Borrows 1 From The Fed 20 RR
Fed
Eva Longorias
0
One Dollar
RR
Excess Reserves
Total(Actual) Reserves
One Dollar
PMC M x ER, so 5 x 1 5 TMS 5 PMC
5 MS currency DD of Public
46
Money Creation Practice Review
47
1,000 DD by Katy MSCurrencyDD of Public

Duck that can dance












New Deposits New Reserves DD
New Required Reserves RR50
DD Created By New Loans equal to new ER





Dance Lessons w. Laura Bush










Bank








5,000.00
2,500.00
2,500.00
A







2,500.00







B
1,250.00
2,500.00
1,250.00






Hunting with Dick Cheney







625.00
C
1,250.00







625.00






312.50
625.00
D
312.50






Prom Dance lessons with N. Dynamite

















5,000.00
PMC



PMC ER2,500 x M2









Katys DD PMC TMS



5,000.00 5,000.00 10,000.00

MS grows by multiple of 2








48
Money Creation Formulas
MS Currency DD of public
RR ER TR TR - RR ER TR - ER RR
Public
Public Student deposits 1.00 in a bank 1. ER
DD-RR x MM PMC 2. PMC 1st DD TMS
Fed

• No Public Fed gives 1.00 loan to a bank
• ER x MM PMC TMS

49
Banks and the Fed
RRERTR TR-RRER TR-ERRR MxERPMC
PMC(Public)1st DDTMS PMC(Fed)TMS
MS Currency DD of
Public Money borrowed from the Fed or gained
thru bond sales is ER can be loaned out 9. RR
is 25 Econ Bank borrows 25,000 from the Fed
its ER are increased by ______. Potential Money
Creation in the system is _______. Potential TMS
is _______. 10. RR is 50 a bank borrows
20,000 from the Fed this one banks ER are
increased by _____. Potential Money Creation
in the system is ______. Potential TMS is
______ 11. RR is 20 the Duck Bank sells 10 M
of bonds to the Fed Duck Banks ER are
increased by ___million. PMC in the system is
__________. TMS is __________. 12. RR is 20
Fed buys 50,000 of securities from Keynes Bank.
Its ER are increased by ___________.
Potential Money Creation in the banking system
is ______________. Potential TMS is
___________. 13. 25 RR Fed buys 400 million
of bonds from the Friar Bank. This one
banks ER are increased by _____million. 14. RR
is 50 the Fed sells 200 million of bonds to a
bank its ER are (increased/decreased) by
_______. Potential Money Creation in the
banking system is (increased/decreased) by
________. 15. RR is 10 a bank borrows 10
million from the Fed this one banks ER are
increased by _______ million. PMC in the banking
system is _______million. Potential TMS is
_______million.
100,000
25,000
100,000
40,000
40,000
20,000
10
50 million
50 million
50,000
250,000
250,000
400
200 M
400 M
10
100
100
50
Banks and the Public
RRERTR TR-RRER TR-ERRR M x ERPMC
PMC(Public)1st DDTMS PMC(Fed)TMS Banks
Public (all DD of Public are subject to the RR
rest is ER can be loaned out) 1. No ER RR is
20 DD of 10 M is made in the Thunder Bank. MS
is ___million. ER increase by ___million.
Potential Money Creation in the banking
system is _____M. Potential TMS is
____million. 2. There are no ER RR is 25
16,000 is deposited in the Duck Bank. MS is
_______. This one bank can increase its loans by
a maximum of _______. Potential Money
Creation in the banking system is _______.
Potential Total Money Supply could be
__________. 3. Econ Bank has ER of 5,000 DD
are 100,000 RR is 25. TR are _______. 4. DD
are 10,000 ER are 1,000 TR are 3,000 RR are
_________. TR-ERRR. 5. Nomics Bank has ER of
10,000 DD of 100,000 RR of 40. TR are
_________. With ER above, Potential Money
Creation in the banking system is __________. 6.
Friar Bank has DD of 100,000 RR is 20 RR ER
are equal. TR are ________. 7. If ER in a bank
are 10,000 DD are 200,000, the RR are 10.
TR are _______. 8. No ER RR is 25. DD of
100,000 is made. MS is _______. This single
bank can increase its loans by _______. PMC in
the system is ________. TMS is ________.
MS currency DD of Public
10
8
50
40
16,000
48,000
12,000
64,000
30,000
2,000
50,000
25,000
40,000
30,000
100,000
75,000
300,000
400,000
51
Fed and the Public
RRERTR TR-RRER TR-ERRR MxERPMC
PMC(Public)1st DDTMS PMC(Fed)TMS
MS Currency DD of the
Public When Fed buys securities from Public,
they will put the money in their DD 16. RR is
50 Fed buys 10 M of bonds from the Public. MS
is increased by _______. ER are increased by
____. PMC in the system is _______. Potential TMS
is _______. 17. RR is 25 Fed buys 100 M of
bonds from the Public. The MS is increased
_______. ER are increased by ______. PMC in the
system is _______. Potential TMS is ________. 18.
RR is 50 Fed sells 200 M of bonds to the
Public. The MS is (incr/decr) by __________.
ER are (incr/decr) by _________. PMC in the
banking system is (increased/decreased) by
_______. Potential TMS is (incr/decr) by
__________. 19. RR is 20 Fed buys 5 million of
securities from the Public. The MS is
increased by _______. ER are increased by
_______. Potential Money Creation in the
banking system is _______. Potential TMS is
_________. 20. RR is 10 Fed buys 50 million of
bonds from the Public. The MS is increased by
_______. ER are increased by _______. PMC in the
banking system is __________. Potential Total
Money Supply is __________.
10 M
20 M
5 M
10 M
100 M
75 M
300 M
400 M
100 M
200 M
400 M
200 M
5 M
4 M
20 M
25 M
50 M
45 M
450 M
500 M
52
1. The RR is 20 Boo Radley deposits 10,000
in the Econ Bank that he has been saving in a
coffee can in a tree. The impact of this
transaction on the ER of the Econ Bank the
potential increase in the money supply would be
Remember MS Currency DD of public (A) ER
would increase by 10,000 the maximum increase
in TMS would be 50,000. (B) ER would increase
by 8,000 the maximum increase in TMS would be
50,000 (C) ER would increase by 8,000 the
maximum increase in MS would be 40,000 (D) ER
would increase by 10,000 the maximum increase
in MS would be 40,000. (E) ER would increase by
40,000 the maximum increase in MS would be
50,000.
Boo
The MS Cash or DD of the public was 10,000
cash. When he deposited the 10,000, the Econ
Bank could loan out ER of 8,000. The 8,000 x MM
of 5 became 40,000 for TMS of 50,000. So,
10,000 MS of cash increased MS by 40,000 to
get the total money supply of 50,000.
Boo
1. RR is 20 Boo Radleys Bank borrows 10,000
from the Fed. The impact of this loan on
the banks ER and then TMS are Remember
again MS Currency DD of public (A) ER would
increase by 10,000 the maximum increase in TMS
would be 50,000. (B) ER would increase by
8,000 the maximum increase in TMS would be
50,000 (C) ER would increase by 8,000 the
maximum increase in MS would be 40,000 (D) ER
would increase by 10,000 the maximum increase
in MS would be 40,000. (E) ER would increase by
40,000 the maximum increase in MS would be
50,000.
All of the 10,000 loan would be ER. Boo Bank
could loan it all out so it could result in a
PMC and TMS of 50,000. MM of 10 x 10,000
50,000
53

• Suppose that all banks keep only the minimum
  reserves required by law and that there are no
  currency drains. The legal RR is 10. If Emilia
  deposits the 100 bill she received as a
  graduation gift from her grandfather into her
  checking account, the maximum increase in the
  total money supply will be
• a. 10
• b. 100
• c. 900
• d. 1,000
• e. 1,100

Remember that currency is also MS. So, the 100
bill was MS when this began. When little Emilia
deposited the 100, the composition of the MS
didnt increase. It just changed from
currency to DD. Now, with the RR at 10, 90 was
loaned by the first bank and with a MM of 10, the
MS increased by 900 more as the TMS
eventually became 10,000.
54
MSCurr.
DD of Public RRERTR TR-RRER TR-ERRR
MxERPMC PMC(Public)1stDDTMS
PMC(Fed)TMS 1. The Hale Bank with no ER
borrows 100,000 from the Fed. With RR of 50
the Hale Bank can increase its loans by a maximum
of __________. PMC in the banking system is
__________. Potential TMS is ______________. 2.
The Davis Bank has DD of 10,000 RR is 10 RR
ER are equal. TR are ______. 3. RR is 20 Fed
buys 50,000 of securities from the public Sarah
Palmer PMC in the banking system is
__________. Potential TMS is ____________. 4. RR
is 40 Buzon Bank borrows 1 million from the
Fed. This bank can increase its loans by a
maximum of _______ __. PMC is __________. TMS is
__________. 5. RR is 10 there are no ER
10,000 is deposited in the Rodriquez Bank.
This bank can increase its loans by a maximum of
__________. Possible Money Creation in the
banking system is ___________. Potential TMs is
_____________. 6. There are no ER in the Vehslage
Bank. Nicole now deposits 10.00. With a RR of
20, PMC in the system is __________. Potential
TMS is ___________. 7. The Terrones Bank has a
RR of 50 the Fed buys 50 million of bonds
from this bank. PMC in the system is
__________. Potential TMS is __________. 8. Marin
Bank has ER of 50,000 DD of 100,000, a RR of
20. TR are ________. 9. RR is 40 the Collins
Bank borrows 10 million from the Fed. This
banks ER are increased by _________. PMC is
__________. Potential TMS is ___________. 10. RR
is 10 Tran Bank borrows 5 from the Fed the
Tran Banks ER are increased by _______. PMC is
__________. Potential TMS is __________.
Practice Money Quiz
Commercial Banks Fed Public
100,000
200,000
200,000
2,000
200,000
250,000
1 million
2.5 M
2.5 mil.
9,000
100,000
90,000
40.00
50.00
100 M
100 M
70,000
25 M
10 M
25 M
5.00
50.00
50.00
55
MS
Currency DD of Public RRERTR TR-RRER
TR-ERRR MxERPMC PMC(Public)1st DDTMS
PMC(Fed)PMC 1. RR is 25 the Boase Bank
has no ER. Geof deposits(DD) 100,000 there.
This bank can increase its loans by a maximum
of ______. PMC is ______. TMS is _______. 2. RR
is 50 the Stansbury Plaza Bank borrows 100,000
from the Fed. This one bank can increase its
loans by a maximum of ________. PMC is _______.
TMS is ________. 3. RR is 25 Fed buys 100,000
of securities from the public Mary Gangel.
Potential Money Creation in the system is
________. Potential TMS is _________. 4. The
Curtis Bank has DD of 200,000 RR is 10 RR
ER are equal. TR are _______. 5. The Recsnik
Bank, with no ER, borrows 200,000 from the Fed.
With a RR of 10, this bank can increase its
loans by _________. PMC in the system is
__________. 6. RR is 20 the Morell Bank borrows
1 from the Fed this bank can increase its
loans by a maximum of _________. PMC in the
banking system is __________. 7. RR is 50 the
Cusimano Bank borrows 1 million from the Fed
this banks ER are increased by _______. PMC in
the system is __________. TMS is __________. 8.
The Masters Bank has ER of 20,000 DD of
200,000, a RR of 10. TR are ______. 9. RR is
25 Fed buys 100 million of bonds from the
Green Bank. Potential Money creation in the
banking system is ________. Potential TMS is
____________. 10. There are no ER in the Farrell
Bank. Erin deposits 2.50. With RR of 20,
PMC in the banking system is ____________.
Potential TMS is _____________.
Money Quiz 1
Banks Fed
Public
100,000
300,000
75,000
400,000
100,000
200,000
200,000
300,000
400,000
40,000
200,000
2 million
1.00
5.00
2 million
1 mil.
2 million
40,000
400 mil.
400 million
10.00
12.50
56
MS Curr.
DD of Public RRERTR TR-RRER TR-ERRR
MxERPMCPMC(Public)1st DDTMS PMC(Fed)TMS
1. RR is 5 there are no ER in the Vehslage
Bank. Trey depositsDD 1.00 there. This
one bank can increase its loans by a maximum of
_______. 2. RR is 25 the Rigal Bank borrows 1
million from the Fed. This one bank can
increase its loans by a maximum of
____________. 3. RR is 50 the Fed buys 100,000
of securities from the public Kate Wells.
Potential Money Creation in the banking system is
____________. 4. The Secker-Dog Killing Bank has
DD of 400,000 RR is 10 RR ER are equal.
TR are ____________. 5. The Terrones Bank , with
no ER, borrows 500,000 from the Fed. With a RR
of 10, how much can this single bank increase
its loans? ____________ 6. RR is 20 the Fed
buys 25,000 of securities from the public
Natalie Marin. Potential Money Creation in
the banking system is ____________. 7. RR is 20
the Rodriquez-Loser Bank borrows 1 million from
the Fed. This single banks ER are increased
by ____________. 8. RR is 25 Fed buys 200
million of securities from the public Rose.
Potential Total Money SupplyTMS could be as
much as _______________. 9. The RR is 25 the
Fed buys 10 million of bonds from the Hicks
Bank. Potential Money Creation in the banking
system could be ____________. 10. There are no
excess reserves in the Stansbury Bank. With RR of
50, Courtney deposits DD 50.00 there.
Potential Money Creation in the system is
_________.
Money Quiz 2
Commercial Banks Fed Public
.95
1 million
100,000
80,000
500,000
100,000
1 million
800 million
30 million
50.00
57
Additional Practice on Money Creation
RRERTR TR-RRER TR-ERRR MxERPMC
PMCPublic1st DDTMS PMCFed TMS
1. If the RR is 40 and the Fed buys 100 M of
bonds from the public Sarah, then the MS is
increased by _______. ER are increased by
______. PMC is _______. TMS would be ______. 2.
RR is 50 and the Bolding Bank borrows 100 M
from the Fed. As a result, RR are increased by
______. ER is increased by _______. PMC and
TMS is increased by ________. 3. Collins Bank has
DD of 400,000 and the RR is 25. If RR and
ER are equal, then TR are _______. 4. The Tran
Bank has ER of 60,000 DD is 200,000. If
the RR is 20, TR are _________. 5. RR is 20
the Fed buys 50 million of bonds from the
public Geof B.. The MS is increased by _______.
ER are increased by _______. PMC is _______.
TMS would be _________.
100 M
150 M
250 M
60 M
0
100 M
200 M
200,000
100,000
50 M
200 M
250 M
40 M
Banks Public Fed
58

• Money Creation Problems from the 2005 Macro MC
  Exam
• (87) 40. Under a fractional reserve banking
  system, banks are required to
• a. keep part of their demand deposits as
  reserves
• b. expand the money supply when requested by
  the central bank
• c. insure their deposits against losses and
  bank runs
• d. pay a fraction of their interest income in
  taxes
• e. charge the same interest rate on all their
  loans
• (72) 41. If a commercial bank has no ER and the
  RR is 10, what is the value of
• new loans this single bank can issue
  if a new customer deposits 10,000?
• a. 100,000 b. 90,333 c. 10,000
  d. 9,000 e. 1,000
• Assets Liabilities
• Total Reserves 15,000 DD 100,000
• Securities 70,000
• Loan 15,000
• (37) 42. A commercial bank is facing the
  conditions given above. If the RR is 12
• and the bank does not sell any of its
  securities, the maximum amount of
• additional lending this bank can
  undertake is
• a. 15,000 b. 12,000 c. 3,000 d.
  1,800 e. 0

The TR 15,000, Securities 70,000, and Loan
15,000 total up to the 100,000 DD. This bank
would have to keep 12,000 of their 100,000 in
RR. With TR of 15,000, they have 3,000 in ER
to loan.
They could increase MS by 5 M, but they are
keeping some in ER, so MS will increase by less
than 5 million.
59
The End