5.02 + 5.03: Banking Flashcards
Assets
What the bank owns
Liabilities
What the bank owes
How does the bank make money?
Through the difference in the interest it charges and pays you.
What is a reserve requirement?
Amount of money banks must have to operate
Why is the banking system called a fractional banking system?
Money is continually lent out and fractioned
Why is a loan considered an asset for the lender and a liability for the borrower?
The bank will receive the interest; the borrower owes the interest
Which money category has the highest liquidity?
M1
Bank Run
When a large number of depositors rush to withdraw their money at the same time
What is the monetary base?
All money created by the central bank
CIC + reserves
Why did the bank runs worsen the Great Depression?
Rapid contraction of money supply –> dec loaning and consumer spending –> further decline in economic activity –> forced banks to liquidate assets, further worsening crisis
How do banks create money?
Give out loans to people for people to pay back
Does banks’ money-making process increase MO or M1
It does not change MO; however, M1 increases
What would happen if banks didn’t loan out all of their excess reserves?
The money supply wouldn’t increase as much
Money Multiplier?
1/Reserve Requirement
Maximum Change in Money Supply?
New Loans x Money Multiplier
