Bank reserves are the currency banks hold in their vaults plus

their deposits at the Federal Reserve.

The reserve ratio is the fraction of bank deposits that a bank
holds as reserves.
The required reserve ratio is the smallest fraction of deposits
that the Federal Reserve allows banks to hold.
Excess reserves are a banks reserves over and above its
required reserves.
A bank run is a phenomenon in which many of a banks
depositors try to withdraw their funds due to fears of a bank
failure.

Deposit insurance guarantees that a banks depositors will be

paid even if the bank cant come up with the funds, up to a
maximum amount per account.

discount window is an arrangement in which the Federal

Reserve stands ready to lend money to banks.

Reserve requirements v Capitol Requirements

Illiquid v insolvent
Money creation and the money multiplayer

Initial money Money/reserve requirements=total new money

$1,000/.1=$10,000
1.d
2. a
3. e
4. c
5. d
How will each of the following affect the money
supply through the money multiplier process?
Explain.
a.People hold more cash.
b. Banks hold more excess reserves.
c. The Fed increases the required reserve ratio.
2. The required reserve ratio is 5%.
a. If a bank has deposits of $100,000 and holds $10,000 as reserves, how much
are its excess reserves? Explain.
b. If a bank holds no excess reserves and it receives a new deposit of $1,000, how
much of that $1,000 can the bank lend out and how much is the bank required to
add to its reserves? Explain.
c. By how much can an increase in excess reserves of $2,000 change the money
supply in a checkable-deposits-only system? Explain.
a. The bank must hold $5,000 as required reserves (5% of $100,000). It
is holding $10,000, so $5,000 must be excess reserves.
b. The bank must hold an additional $50 as reserves because that is the
reserve requirement multiplied by the deposit: 5% of $1,000. The bank
can lend out $950.
c. The money multiplier is 1/0.05 = 20. An increase of $2,000 in excess
reserves can increase the money supply by $2,000 20 = $40,000.
A commercial bank accepts deposits and is covered by deposit insurance.
An investment bank trades in financial assets and is not covered by deposit
insurance.
A savings and loan (thrift) is another type of deposit -taking bank, usually
specialized in issuing home loans.
A financial institution engages in leverage when it finances its investments with
borrowed funds.
The balance sheet effect is the reduction in a firms net worth from falling asset
prices.
A vicious cycle of de leveraging takes place when asset sales to cover losses
produce negative balance sheet effects on other firms and force creditors to call in
their loans, forcing sales of more assets and causing further declines in asset
prices.
Federal Reserve: The Central Bank of the US
The federal funds market allows banks that fall short of the
reserve requirement to borrow funds from banks with excess
reserves.
The federal funds rate is the interest rate determined in the
federal funds market.
The discount rate is the interest rate the Fed charges on loans
to banks.
An open-market operation is a purchase or sale of government
debt by the Federal Reserve.
1.d
2. e
3. D
4.b
5. c
Short -term interest rates are the interest rates on
financial assets that mature within less than a
year.
 Long -term interest rates are interest rates on financial assets that
mature a number of years in the future.
The money demand curve shows the relationship between the
quantity of money demanded and the interest rate.
 Shifts of the Money Demand Curve
Changes in the Aggregate Price Level
Changes in Real GDP
Changes in Technology
Changes in Institutions
 The money supply curve shows how the quantity of money supplied
varies with the interest rate.
According to the liquidity preference model of the interest rate, the
interest rate is determined by the supply and demand for money.
1. d
2. d
3. b
4. d
5. e
Draw three correctly labeled graphs of the money market. Show the
effect of each of the following three changes on a separate graph.
a. The aggregate price level increases.
b. Real GDP falls.
c. There is a dramatic increase in online banking.