4.4: Banking & The Expansion Of The Money Supply

Question 1

Fractional Reserve Banking

Answer 1

When banks hold a portion of deposits to cover potential withdrawals and then loans the rest of the money out

Question 2

Money Multiplier

Answer 2

Money Multiplier = 1/ Reserve Requirement( ratio)

Say the reserve ratio is 10%
You deposit $1000
Bank must hold $100
Bank lends $900 out and so on

Question 3

Demand Deposits

Answer 3

Money deposited in a commercial bank in a checking account

Question 4

Required Reserves

Answer 4

The % that banks must hold by law

Question 5

Excess Reserves

Answer 5

The amount that bank can loan out

Question 6

Balance Sheet

Answer 6

A record of a bank’s assets, liabilities, and net worth

Question 7

What are demand deposits to banks and depositors?

Answer 7

Banks: liability

Depositor: Asset

Question 8

What makes a bank balance sheet, balanced?

Answer 8

It’s balanced because the totals must be equal for the assets and liabilities.

Question 9

Change in Money Supply Formula

Answer 9

change in reserves * money multiplier

Question 10

Calculate reserve requirements

Answer 10

Required reserves / demand deposit