Unit IV: Components and Definitions

Components and Definitions

Liabilities:

1.    Cash deposits from the public= DD

2.    Owner’s equity or stock shares= Values of the bank stocks as held by the public

Assets:

1.    RR= The percentage of the DD in the Vault

2.    Excess reserves= The remaining % of DD, used for loans

3.    Property= usually a statement of the bank’s property

4.    Securities= Previously purchased bonds held by the bank as investments

5.    Loans= previously loaned funds now owned back to the bank

Assets	Liabilities
1.    DD or CD 2.    Owner’s equity	1.    RR 2.    ER

 Remember= DD=RR+ER

Bonds can move two ways:

1.    The Fed sells to the banks and increases the amount.

2.    The Fed buys from the banks and decreases the amount.

Banks and the Money Supply

The Money Multiplier process creates new money for the economy,

Scenario #1:

A private citizen takes that they possess and put in into a bank account.

·       The cash placed into the bank is already part of the money supply.

·       The deposit is counted as a bank liability.

·       A percentage must be placed into the required reserve.

·       The remainder is placed into ER.

·       The bank will want to lend all of the ER, if possible

·       The amount in ER is multiplied by the multiplier

·       This will be assumed to become new loans in the banking system

·       This will be counted as the change in the money supply

Scenario #2

·       The Fed buys bonds back from the public.

·       The public now has new cash

·       This new cash is new loans

·       Assume that the public puts cash into the DD

·       A set percentage is placed into RR

·       The remainder becomes ER

·       ER are multiplied by the Money Multiplier (1/RRR)

·       The amount becomes new loans and is new money supply

·       The total change in the Money Supply is the amount of demand deposits plus the new loan amount

Scenario #3

·       The Fed buys bonds back from the member banks

·       The bank now has new ER

·       No money is needed to be placed into RR since this is not owed to the public

·       All of these ER are multiplied by the multiplier

·       This amount becomes new loans

This change is the change in the money supply