• it issues paper currency
• sets reserve requirements and hold reserves of banks
• it lends money to banks and charges then interest
• they are a check clearing service for banks
• it acts as personal bank for the government
• supervises member banks
• controls the money supply in the economy
Three types of multiple deposit expansion
1. Calculate the initial change in excess reserves
- xaka the Amount a single bank can loan from the initial deposit
2. Calculate the change in loans in the banking system
3. Calculate the change in the money supply
- sometimes type 2 and type 3 will the same result (I.e. No Fed involvement)
4. Calculate the change in demand deposits
Creating a bank
• transaction #4
• depositing reserves in a federal reserve bank
- required reserves
- reserve ratio
• reserve ratio = commercial banks required reserves/ commercial banks Checkable-deposit liabilities
Reserve requirements
• excess reserves
- actual reserves - required reserves
• required reserves
-checkable deposits x reserve ratio
How banks work
• assets
- reserves:
. Required reserves (rr) - % required by fed to keep on hand to meet demand
. Excess reserves (er) - % reserves over and above the amount needed to staidly the minimum reserve ratio set by fed
- loans to firms, consumers and other banks (earns interest)
- loans to govt. = treasury securities
- bank property - (if blank fails, you could liquidate the building/property)
• liabilities + equity
- demand deposits ($ put into bank)
- timed deposit (CD's)
- loans from: federal reserve and other banks
- shareholders equity - (to set up a bank, you must invest your own money in it to have a stake in the banks success or failure)
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