All Flashcards
What is the difference between required reserves and excess reserves?
Required reserves are the amount banks must legally hold, while excess reserves are the amount banks can loan out.
Compare and contrast assets and liabilities on a bank's balance sheet.
Assets are what the bank owns (e.g., reserves, loans), while liabilities are what the bank owes (e.g., deposits).
How do changes in the reserve ratio affect the money multiplier differently than changes in excess reserves?
Changes in the reserve ratio directly alter the money multiplier, while changes in excess reserves affect the amount of money that can be multiplied.
Differentiate between the money multiplier and the reserve ratio.
The reserve ratio is the fraction of deposits banks must hold, while the money multiplier shows how much the money supply can expand from an initial deposit and is the inverse of the reserve ratio.
What is the difference between the change in demand deposits and the change in the money supply?
The change in demand deposits reflects the total deposits, while the change in the money supply only reflects the new loans created.
Compare and contrast fractional reserve banking and 100% reserve banking.
Fractional reserve banking involves banks loaning out a portion of deposits, creating new money, while 100% reserve banking requires banks to hold all deposits in reserve, preventing money creation.
What is the difference between the money multiplier and the fiscal multiplier?
The money multiplier relates to changes in the money supply and monetary policy, while the fiscal multiplier relates to changes in government spending and taxation.
Compare and contrast the impact of increasing the reserve requirement versus increasing the discount rate.
Increasing the reserve requirement directly reduces banks' lending capacity, while increasing the discount rate makes it more expensive for banks to borrow from the Fed.
What is the difference between the nominal money supply and the real money supply?
The nominal money supply is the actual amount of money in circulation, while the real money supply is adjusted for inflation.
Compare and contrast the effects of an open market purchase and a decrease in the reserve requirement.
Both increase the money supply, but an open market purchase involves the Fed buying government bonds, while a decrease in the reserve requirement allows banks to lend more.
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).
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).