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29
Economics
N. Gregory
PRINCIPLES OF
Mankiw
In this chapter,
look for the answers to these
questions:
Board of Governors
(7 members),
located in Washington, DC
Ben S. Bernanke
Chair of FOMC,
Feb 2006 present
Committee (FOMC),
includes the Bd of Govs and
presidents of some of the regional Fed banks
The FOMC decides monetary policy.
THE MONETARY SYSTEM
Bank Reserves
In a fractional reserve banking system,
banks keep a fraction of deposits as reserves
and use the rest to make loans.
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Bank T-account
T-account: a simplified accounting statement
that shows a banks assets & liabilities.
Example:
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FNB holds
100% of
deposit
as reserves:
Money supply
= currency + deposits = $0 + $100 = $100
In a 100% reserve banking system,
banks do not affect size of money supply.
THE MONETARY SYSTEM
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T-account
looks like this:
Assets
Liabilities
Reserves $ 90
$ 90
9 Deposits
Loans
$ 81
0
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T-account
looks like this:
Assets
Liabilities
Reserves $ $8.10
81 Deposits
$ 81
Loans
$ 0
$72.90
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$ 100.00
$ 90.00
$ 81.00
$ 72.90
..
.
In
In this
this
example,
example,
$100
$100 of
of
reserves
reserves
generates
generates
$1000
$1000 of
of
money.
money.
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ACTIVE LEARNING 1
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ACTIVE LEARNING 1
Answers
You deposit $50 in your checking account.
A. What is the maximum amount that the
money supply could increase?
ACTIVE LEARNING 1
Answers
You deposit $50 in your checking account.
A. What is the maximum amount that the
money supply could increase?
Answer: $200
B. What is the minimum amount that the
money supply could increase?
Answer: $0
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20
prime
3-month Tbill
15
(%)
mortgage
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0
1970
1975
1980
1985
1990
1995
2000
2005
rf
The Federal
Funds market
S2
S1
3.75%
3.50%
D1
causes rf to rise.
F2 F1
Quantity of
federal funds
THE MONETARY SYSTEM
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CHAPTER SUMMARY
Money includes currency and various types of
bank deposits.
CHAPTER SUMMARY
In a fractional reserve banking system, banks
create money when they make loans. Bank
reserves have a multiplier effect on the money
supply.
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