14 - 1 Copyright McGraw-Hill/Irwin, 2002 Balance Sheet of a Commercial Bank Formation of a Commercial Bank Multiple Deposit Expansion Process The Monetary Multiplier Outcome of Money Expansion Need for Monetary Control Key Terms Previous Slide Next Slide End Show How Banks and Thrifts Create Money C H A P T E R
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14 - 1Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
How Banks and
Thrifts Create Money
C H A P T E R
14 - 2Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
BALANCE SHEET OF A
COMMERCIAL BANK
ASSETS = LIABILITIES + NET WORTH
The Goldsmiths
Fractional Reserve Banking
System
Money Creation & Reserves
Bank Panics & Regulation
14 - 3Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 1
Creating a bank$250,000 Cash
forCapital Stock
14 - 4Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
Cash $250,000 Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
Deposit Added to Vault Cash
14 - 5Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
Cash $250,000 Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 2
Acquiring Property andEquipment
$240,000 Cash
14 - 6Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
Cash $ 10,000Property 240,000
Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
14 - 7Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
Cash $ 10,000Property 240,000
Capital Stock $250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
TRANSACTION 3
AcceptingDeposits
$100,000 Cash
14 - 8Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
Cash $110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
14 - 9Copyright McGraw-Hill/Irwin, 2002
Balance Sheet of a
Commercial Bank
Formation of a
Commercial Bank
Multiple Deposit
Expansion Process
The Monetary
Multiplier
Outcome of Money
Expansion
Need for Monetary
Control
Key Terms
Previous
Slide
Next
Slide
End
Show
Cash $110,000Property 240,000
Checkable Deposits $100,000
Capital Stock 250,000
FORMATION OF ACOMMERCIAL BANK
ASSETSLIABILITIES AND
NET WORTH
NOTES:Bank deposits aresubject to a reserverequirement.
Bankers pursue two conflicting goals:Profits and Liquidity
Note use of Federal Funds Market...Note use of Federal Funds Market...Note use of Federal Funds Market...Note use of Federal Funds Market...Federal Funds RateFederal Funds RateFederal Funds RateFederal Funds Rate