alomar_111_mcp1 money creation process. alomar_111_mcp2 a person opens a checking account at bank...
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![Page 1: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/1.jpg)
Alomar_111_MCP 1
Money Creation Process
![Page 2: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/2.jpg)
Alomar_111_MCP 2
A person opens a checking account at bank (A) with (KD100) in cash.
This rises the liability of the bank by (100)
If the bank keeps the (100) in cash, this rises the assets side of the balance sheet
![Page 3: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/3.jpg)
Alomar_111_MCP 3
A L
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Alomar_111_MCP 4
Since cash is part of bank’s reserves, the (100) becomes reserves now
A L
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Alomar_111_MCP 5
If the required reserve ratio = 10%, then reserves can be divided into:
Required reserves = (10%)(100)=KD10
Excess reserves = 100-10= KD90
![Page 6: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/6.jpg)
Alomar_111_MCP 6
A L
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Alomar_111_MCP 7
Since excess reserves earn no interest. Bank (A) may choose to make a loan worth of (90). (why not lend the 100)?
The bank make profits now: (interest paid on loan) – (interest
paid on deposits)
![Page 8: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/8.jpg)
Alomar_111_MCP 8
A L
RR 10 Checkable D 100ER 0Loans 90
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Alomar_111_MCP 9
Assume now that your friend who borrowed the (KD90), went to bank (A) and opened a checking account
![Page 10: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/10.jpg)
Alomar_111_MCP 10
A L
RR 19 Checkable D1 100ER 81 Checkable D2 90Loans 90 190 190
![Page 11: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/11.jpg)
Alomar_111_MCP 11
Total deposits = KD190 Since excess reserves earn no
interest, bank (A) will make a loan of the (81) to another person.
Excess reserves = 0 Total loans = KD171
![Page 12: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/12.jpg)
Alomar_111_MCP 12
A LRR 19 Checkable D1 100ER 0 Checkable D2 90Loans 171 190 190
![Page 13: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/13.jpg)
Alomar_111_MCP 13
This process will continue… We started with (KD100) but total
deposits increased by more than the initial (KD100)
This is called “money creation”
![Page 14: Alomar_111_MCP1 Money Creation Process. Alomar_111_MCP2 A person opens a checking account at bank (A) with (KD100) in cash. This rises the liability of](https://reader036.vdocument.in/reader036/viewer/2022072117/56649ece5503460f94bdb9fd/html5/thumbnails/14.jpg)
Alomar_111_MCP 14
Deposit multiplier = 1/rrr = 1/0.10=10 Thus, the total amount of deposits
bank (A) can create = (10)(100) = KD1000
Total loans = 1000 – 100 = 900(total deposits – total required
reserve)