money creation Flashcards
(36 cards)
how are deposits created
net creation of deposits does not happen. Banks make it out of thin air
despoitory institutions can hold ________
reserves
despoist insurance
if you put money into bank you will get it back
Bank vs NBFI
which has deposit insruance
bank
example of despository institutions (banks)
-commerical banks
-saving and loan institutions
-credit unions
Nonbank financial institutions (NBFIs) example
-ETFs or hedgefunds
-pensions funds
-insurnace companies
bamk assets
vault cash (untouchable) and reserves
NBFI assets
cash and deposits
-cash bevause counterparty is a bank not the Fed
desoits are
something you have to pay
difference in liabilities between bank and NFBI
bank = despoist
NFBI= bank loans
what is another link between HH and firms
banks
what do HH not interact with
Fed
dollars in banking system
-vault cash
-reserves
dollars in real economy
-currency
-despoits
vault cash is needed for
cash withdrawl
reserves is needed for
electronic like venmo
only ______ and ________ can be used to buy goods and services
currency and depoists
why would firms accept electronic IOUs from banks as a means of paymnet but not IOUs from NBFIs
because it is insured. If counterparty is FDIC insured you only have to worry about govnt
suppose your fiend owes you $100. Why migt you value this claim as less than $100
in a month yo umight value it less because of credit risk and he might not be able to follow through on promise
suppose your fiend owes you $100. Do you expect firms to accept this IOU as a means of payment from you?
no, problem is it is not insured and they don’t know who Fred is
suppose now that all of a sudden Fred’s IOU is insured by the FDIC. How would you feel about this development
you would feel positively because now counterparty has chnaged, If fred does not pay you govnt can still pay you
suppose now that all of a sudden Fred’s IOU is insured by the FDIC and that everyone knows about it. Would you expect firms to accept Fred’s IOU as a means of payment now
yes because they don’t have ti trust Fred because counterparty is FIDC
suppose now that all of a sudden Fred’s IOU is insured by the FDIC and Fred issues you another $100 IOU. What did he just do
he made money
who has power to create money in a fiat system
anyone whos liabilities are accepted as a means of payment
