What does the T-account show about a bank's financial position?
It shows the bank's assets (what it owns) and liabilities (what it owes), which must always balance.
In a bank balance sheet, what does 'demand deposits' represent?
It represents the money held in checking accounts, which is a liability for the bank.
On a T-account, how do you calculate the amount of new loans a bank can make?
New loans = Excess Reserves. Excess reserves = Total Deposits - Required Reserves.
How do you determine required reserves from a bank balance sheet?
Multiply the demand deposits by the reserve ratio.
In a bank balance sheet, what are the main components?
Demand Deposits, Required Reserves, Excess Reserves, and Loans.
What does the asset side of a bank's balance sheet represent?
It represents what the bank owns, including reserves and loans.
What does the liabilities side of a bank's balance sheet represent?
It represents what the bank owes, primarily demand deposits.
What does it mean if a bank's assets do not equal its liabilities?
It indicates an error in the balance sheet; assets must always equal liabilities.
How do you analyze a T-account to determine the potential change in the money supply?
Multiply the excess reserves by the money multiplier.
How does a new deposit impact a bank's T-account?
It increases both the bank's assets (reserves) and liabilities (demand deposits).
How does the Federal Reserve use the reserve requirement to influence the money supply?
By increasing the reserve requirement, the Fed reduces the money multiplier and contracts the money supply. Decreasing the reserve requirement increases the money multiplier and expands the money supply.
What is the impact of increasing the reserve requirement on banks' lending capacity?
It reduces banks' lending capacity, as they must hold a larger portion of deposits as reserves.
How does a change in the reserve requirement affect the money multiplier?
An increase in the reserve requirement decreases the money multiplier, and vice versa.
What is the effect of the Fed lowering the reserve ratio?
Banks have more money to lend, increasing the money supply and potentially stimulating economic activity.
How does the reserve requirement affect the overall economy?
It influences the amount of credit available, impacting interest rates, investment, and economic growth.
What is the impact of a higher reserve ratio on the money supply?
It decreases the money supply by reducing the money multiplier.
What is the impact of a lower reserve ratio on the money supply?
It increases the money supply by increasing the money multiplier.
How can the Fed use reserve requirements to combat inflation?
By increasing the reserve requirement, reducing the money supply and aggregate demand.
How can the Fed use reserve requirements to stimulate a recessionary economy?
By decreasing the reserve requirement, increasing the money supply and aggregate demand.
What are some limitations of using reserve requirements as a monetary policy tool?
Frequent changes can disrupt bank operations, and banks may choose to hold excess reserves, reducing the impact.
Define Fractional Reserve Banking.
Banks hold only a fraction of deposits as reserves and loan out the rest.
What is the Reserve Ratio (rr)?
The fraction of deposits banks are required to keep as reserves, set by the Federal Reserve.
Define Required Reserves.
The amount of money banks must keep in their vaults or at the Fed.
What are Excess Reserves?
The amount of money banks can loan out.
What is the Money Multiplier?
Shows how much the money supply can expand from an initial deposit.
Define Liabilities (in banking).
What the bank owes to others (e.g., deposits).
Define Assets (in banking).
What the bank owns (e.g., reserves, loans).
What are Demand Deposits?
Money held in checking accounts (a liability for the bank).
Define Banks.
Financial institutions that accept deposits and make loans.
What is the reserve requirement?
The fraction of deposits banks are required to keep as reserves, set by the Federal Reserve (the Fed).
