Liabilities and Assets

• Bank Balance Sheet = Assets and Liabilities in a T-Account
• Liabilities = DD + Owner's Equity ( Stock Shares )
• Assets = RR , ER , Bank Properly , Securities , Loans
• Assets must equal Liabilities
• DD = RR + ER
• Money is created through the Monetary Multiplier
• ER x 1 / RR ( multiplier )
• this equals New Loans throughout the banking system
• Money Supply is affected ...
• cash from a citizen becomes DD , but does NOT change the Money Supply
• ER from this cash becomes "immediate" loan amount
• ER x Multiplier become
• new loans and DD changes the Money Supply
• The FED buying bonds
• creates new loans and changes the Money Supply
• IF the FED buys the bonds
• on the open market, this becomes a new DD amount
• IF the FED buys bonds
• from the account already held by a particular bank, then the amount only becomes new ER
• Bonds
• bond "prices" move opposite to the changes in interest rates
• the higher the interest rate will push bond prices down ( less money supply )
• the lower the interest rate will push bond prices up ( more money supply )

Three Types of Multiple Deposit Expansion Questions :

1. Type 1 
• Calculate initial change in excess reserves
• aka , the amount a single bank can loan from initial deposits
2. Type 2
• Calculate change in loans in the banking system ( money multiplier )
3. Type 3
• Calculate change in the money supply
• sometimes Types 2 and 3 will have the same results
• ex : no FED involvement
4. Type 4
• Calculate change in demand deposits
• cash, checking account

Liabilities :

1. Cash deposits from the public = DD
2. Owner's Equity or Stock Shares = values of the bank stocks as held by the public

Assets :

1. Required Reserves = the percentage of DD in the Vault = RR
2. Excess Reserves = the remaining % of DD , used for loans = ER
3. Banking Property Holdings = usually a statement of the bank's property values
4. Securities = previously purchased bonds held by the bank as investments
5. Customer Loans = previously loaned funds now owed back to the bank

REMEMBER THAT DD = RR + ER

Bonds can move in two ways

1. the FED sells to the banks and increases the amount
2. the FED buys from the banks and decreases the amount

Banks and the Money Supply

- the money multiplier process creates new money for the economy

• Scenario # 1 :
• A private citizen takes cash that they possess and put it into a bank account
• The cash placed into the bank is already part of the money supply
• the deposit is counted as a bank liability
• a percentage must be placed into required reserves
• the remainder is placed into excess reserves
• the bank will want to lend all of the excess reserve , if possible
• the amount in excess reserve is multiplied by the multiplier
• this will be assumed to become new loans in the banking system
• this will be counted as the change in the money supply
• Scenario # 2 :
• the FED buys bonds back from the public
• the public now has new cash
• this new cash is new loans
• assume that the public puts the cash into demand deposits
• a set percentage is placed into required reserves
• the remainder becomes excess reserves
• excess reserves are multiplied by the Money Multiplier ( 1 / RR )
• this amount becomes new loans and is new money supply
• the total change in the Mooney Supply is the amount of demand deposits plus the new loan amounts
• Scenario # 3 :
• the FED buys bonds back from the member banks
• the bank now has new excess reserve
• no money is needed to be placed into required reserves , since this is not owed to the public
• all of these excess reserves are multiplied by the multiplier
• this amounts becomes new loans
• this amounts is the change in the money supply

Cause and Effects of the Money Supply :

• changes in the MS will move the supply line on the Money Market Graph
• changes in the MS will change nominal interest rate
• changes in the MS can create inflation or dis-inflation
• change in inflation can change real wages
• changes in inflation rates also affect the international currency markets
• changes in interest rates affect the prices of bonds in an inverse relationship