Econ Tutorial

The U.S. banking system creates money by allocating the excess reserves from a deposit at creating a loan from the Home Bank. In other words, say I deposit a $100.00 in Bank #1, where Bank #1 is able to lend out some of my money to another customer. So, Bank #1by law needs to hold 10% of what I deposited which is known as required reserves. Therefore, the required reserves of my $100 is $10. So, Bank#1 is able to provide a $90 loan to another customer, which we will name Moe, from my $100. Then, Moe will turn around and spend that money which will eventually make its way to another bank, which we will call Bank #2. So, Bank #2 will be able to loan out $81 of Moe’s $90 yet, Bank #2 is still required to keep 10% which is required reserves, which is $9 of the $90.

c) In a recession, the Bank of Canada will conduct an open market purchase to lower the interest rate. The quantity of investment will increase, and other interest-sensitive expenditure items will also increase. With an increase in aggregate expenditure, the multiplier increases aggregate demand, bringing real GDP to equal potential GDP, and a recession will be eliminated.

Under the Uniform Commercial Code (UCC), section 3-302, the bank took the check for value, in good faith, without notice that the check was dishonored, and had not been altered. Therefore, the credit union paid the check, indorsed the instrument, and submitted to the maker for payment. (Law.Cornell.com, 2015) Due to the fact that the Credit union met the requirements of the UCC, section 3-302 they are a Holder in Due Course.

Suppose a bank has $10,000 in deposits and $8,000 in loans. It has loaned out all it can. It has a reserve ratio of C

Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank. (Times) . When a bank is left with excess reserves they can do a federal refund and lend money to other banks that might be running low on reserves. The reserve ratio is applied when the bank is low on the amount of reserves it has, at this time the bank is than forced to reduce checkable deposits while reducing its money supply. In some cases is also may need to increase its reserves. The bank can increase its reserves by selling bonds, which would also lower the money supply in the

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

9. If the demand for a good is perfectly price inelastic in the short run and the supply curve is upward sloping, imposing a sales tax on the good will

For centuries, banks have relied on fractional reserve banking. This is the method in which only a fraction of a bank’s deposits are actually backed by a reserve of cash-on-hand, available for immediate withdrawal. This procedure allows the bank more capital to lend and at the same time, grows the economy. The reserve amounts are determined by a ratio stipulated by the Federal Reserve. In theory, fractional reserve banking works most of the time. However, in difficult economic times, people have demanded to withdraw their money

Reserve requirements have been used for a long time as a monetary policy tool in order to control money supply. In the recent years this policy tool has been also proven to be a powerful tool of macroprudential policy. Opportunity costs associated with maintaining required reserves affect the decisions of banks about their borrowing and lending activities. Therefore central banks, changing reserve requirement ratio can influence the lending behavior of commercial banks and therefore the loan supply of banks.

According to Keister and McAndrews (2009), there is a very simple explanation for the huge amounts of money being held as excess reserves by banks. In their article, "Why Are Banks Holding So Many Excess Reserves?" Keister and McAndrews explore the nature of reserves in a normal economic situation comparing it with the crisis situation "following the collapse of Lehman Brothers" in 2008 (Keister and McAndrews, 2009). Though some would argue that the amount of excess reserves currently being held would indicate a failure on the part of the policies implemented by the Federal Reserve, Keister and McAndrews argue that it is merely a reflection of the scale of the policies implemented as well as a result of the Federal Reserve now paying interest on reserves (Keister and McAndrews, 2009). Further, Keister and McAndrews (2009), assert that by now paying interest on the reserves, the Central Bank can now control the target interest rate without manipulating reserves. Additionally, Keister and McAndrews (2009,) conclude that the, 'size of the reserves only reflects the size of the Federal Reserve's policy initiatives and indicate almost nothing about the effectiveness of these initiatives.'

D) unplanned inventory investment is negative. If real GDP is smaller than planned aggregate spending:

If the banks use the excess reserves, it will increase the money supply. Using the deposit expansion multiplier, you cans see that when banks create additional loans using their excess reserves. Each time a loan is processed, and the money is deposited into a checking account, that money minus what the bank keeps for its reserve, is added to the money supply.

The central bank’s liabilities are also seen in three different forms which are: currency, government deposit accounts, and deposit accounts of the commercial bank. These can also be divided into different groups based on their purpose. The currency and government deposit accounts allow the central bank to perform its role as the government’s bank. Currency is used in daily transaction everywhere, and since it circulates in the hands of the nonbanking public, it is the principal liability of most central banks. Government accounts are used as a place to deposit the income and used to pay for the things they buy, it is nearly similar to what people need a deposit account for. The central bank provides the government an account to deposit their funds, and they can shift their funds between accounts at commercial banks and the Federal Reserve. Lastly, is the commercial accounts and contains two parts: one is the deposits at the central bank and the cash in the bank’s own vault. The bank can withdrawal funds from the central bank, and the commercial bank can wire portions of a deposit accounts

In most countries, commercial banks’ reserve accounts with the central bank must have a positive balance at the end of every day; in some countries, the amount is specifically set as a proportion of the liabilities a bank have that is on its customers. This is known as a reserve requirement. At the end of every day, a commercial bank will have to examine the status of their reserve accounts. Those that are in deficit have the option of borrowing the required funds from the central bank, where they may be charged a lending rate which is also referred to as the discount rates on the amount they borrow. In a balanced system, where there are just enough total reserves for all the banks to meet requirements, the short-term interbank lending rate will be in between the support rate and the discount rate. Both the Treasury and the central bank are involved in these reserve management operations to maintain interest rate stability (Palley, 2012). This applies to the relationship between the Central Bank of Kenya and its regulatory requirement to maintain a capping that is below 14%. CBK finances commercial banks at much lower rate on their borrowing so that the banks can fix their interest charges on borrowed money at certain percentage that must not exceed the limit set by the

In economic terms, deflation is defined as a persistent fall in the general level of prices (Groth et al, 2009). In this policy, government authorities perform Open Market Operations where government buys and sells securities for controlling the money supply. It is a direct method of controlling credit, in order to reduce the flow of money. Due to this