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    6.1.6 Practice

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    KyrieSwerving
    Fractional reserve banking allows banks to loan out most deposits received while keeping only a small fraction in reserve. This system relies on public faith in banks. When faith is lost and many depositors demand cash at once, it can cause bank runs and failure since banks don't have enough cash on hand. The Federal Reserve regulates banks and controls money supply through required reserve ratios, discount rates, and open market operations. Money creation occurs as banks make loans and new deposits are created through the money multiplier effect.

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    6.1.6 Practice

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    KyrieSwerving
    830 views2 pages
    Fractional reserve banking allows banks to loan out most deposits received while keeping only a small fraction in reserve. This system relies on public faith in banks. When faith is lost and many depositors demand cash at once, it can cause bank runs and failure since banks don't have enough cash on hand. The Federal Reserve regulates banks and controls money supply through required reserve ratios, discount rates, and open market operations. Money creation occurs as banks make loans and new deposits are created through the money multiplier effect.

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    6.1.6 AP Macroeconomics Practice

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    Fractional reserve banking allows banks to loan out most deposits received while keeping only a small fraction in reserve. This system relies on public faith in banks. When faith is lost and many depositors demand cash at once, it can cause bank runs and failure since banks don't have enough cash on hand. The Federal Reserve regulates banks and controls money supply through required reserve ratios, discount rates, and open market operations. Money creation occurs as banks make loans and new deposits are created through the money multiplier effect.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    830 views2 pages

    6.1.6 Practice

    Uploaded by

    KyrieSwerving
    Fractional reserve banking allows banks to loan out most deposits received while keeping only a small fraction in reserve. This system relies on public faith in banks. When faith is lost and many depositors demand cash at once, it can cause bank runs and failure since banks don't have enough cash on hand. The Federal Reserve regulates banks and controls money supply through required reserve ratios, discount rates, and open market operations. Money creation occurs as banks make loans and new deposits are created through the money multiplier effect.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    6.1.

    6 Practice
    AP Macroeconomics

    6.1.6 Practice

    1.
    a. Fractional reserve banking means banks hold a very small portion of its total deposits on
    hand. Small meaning most banks hold about 10% of their total deposits on hand. The
    remainder of the money people deposit in banks is loaned out. A fractional reserve
    banking system relies on the idea that most of us want access to only a small
    percentage of our total deposits.
    b. The banks create money by loaning out the money that people have deposited and
    earning interest on it. They only keep a small fraction of it (less than 10%) on hand.
    c. The two major assets are deposits at the Federal Reserve and loans to the public. The
    main liabilities of a typical bank are customer deposits.
    d. Fractional reserve banking works as long as people have faith in the system and in their
    bank. When people lose that faith, the bank experiences a run which means that many
    depositors show up all at once and demand their balance in cash. This means that the
    bank would go out of business since it doesn’t have funds on hand to pay everyone who
    is asking for their money. This system is dependent on the public.

    2.
    a. Banks hold deposits at the Fed, borrow money from the Fed, and the Fed clears checks
    between banks. The government gives you your deposit up to 100,000 if the bank fails,
    regulates banks (Ex: by seeing if it has the required reserve ratio and if bank loans are
    repaid). The Fed regulates the banks by saying no high – default risk loans, no investing
    in the stock market, and it has to have oversight by many groups (including Federal
    Reserve).
    b. To control money supply the Federal reserve uses the required reserve ratio, the discount
    rate and open market operations. The required reserve ratio is the minimum percentage
    of total deposits that must be held on hand and rarely changes. The idea behind the
    discount rate is that the interest rate the Fed charges to banks for Discount Window
    loans. Open market operations are the sales and purchases of treasury bonds by the
    Fed.

    3.
    a. The result of this deposit would be the money supply changing by 900,000 because the
    change in excess reserves is 90,000 and the money multiplier is 10.
    b. There will be an increase of $833,333.33
    c. There will be an increase of $6944444.42
    d. If ARR is 12%, the maximum change in money would be 100,000/0.12, which is
    $833,333.
    e. Money creation is called money creation because even though the central bank is
    responsible for the first creation and first destruction of money (and the size of the
    money supply) it relies on banks and the money multiplier to enhance its activities. Even
    though the banks are not directly involved in money supply, it does work as a important
    money creation

    4.
    a. This will result in a decrease in the money supply because the multiplier is smaller
    because banks will keep most of their excess reserves since they will not make as many
    loans.

    b. This will result in an increase in the money multiplier because there will be an increase in
    money supply since banks will loan out most of its excess resources.

    c. There is a serious issue because they only work as long as people have faith in the
    system. When that faith is lost banks will have many depositors show up all at once to
    demand their balance in cash. This will result in the bank going out of business because
    they don't have that much cash on hand. The FDIC is able to prevent this by acting as an
    insurance program on bank deposits. The FDIC provides a guarantee that if the bank
    fails, it will give you your deposit up to $100,000.

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