Creating a Bank
- A single bank can create money through loans by the amount of excess reserves
- The banking system as a whole can create money by a multiple deposition money multiplier of the initial excess reserves.
- The banking system as a whole can create money by a multiple deposition money multiplier of the initial excess reserves.
How banks work
Assets
Liabilities and Equity
demand deposits: money put into bank
timed deposits (CD's)
loans from: Federal Reserve and
banks
shareholder's equity: (to set up a
bank must invest own money in to to have a stake in the banks success or
failure)
Factors that weaken the effectiveness of the deposit multiplier
1. If banks fail to loan out all of their excess reserves
2. If bank customers take their loans in cash rather than in new checking account deposits it creates a currency or cash drain.
2. If bank customers take their loans in cash rather than in new checking account deposits it creates a currency or cash drain.
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