Chapter 7: The Interactions of Bank Deposits, Bank Reserves, and the Money Multiplier Flashcards
What did banking start as and when did it start and what was the first bank?
Started off facilitating in international trade and commerce in the 12th century (1817)
Bank of Montreal
A small group known as____
Where were they located?
What were their duties?
Knights of Christ (Knights Templar)
Jerusalem
-Military escort to religious pilgrims who were making their journey from the Mediterranean Sea to Jerusalem.
-entrusted with the responsibility of transporting vast sums of money and other valuables throughout Europe and the Holy Land for kings, nobles, and merchants
-Disbanded and replaced by formal banks and financial houses in early 1300’s in London, England (Trade center at the time)
Where was the Major center for international trade, commerce and banking located and for how long?
London, England for centuries
2 Main activities for Basic Banking
Providing a place to put money on deposit
Providing a place to borrow money
Two important effects have been created by this simple act of depositing money into a bank account
- provided the bank with the funding it requires in order to make loans and other investments
- The economy has been given access to more liquidity (money)
Deposits are both an ______ and a _______
Assets and Liability
What are assets called when they “sit” in a vault or account?
Unproductive assets
How much money do banks hold in their vaults?
Why is there very little money in the banks?
only about $ 1,265 of actual cash money, per person* in Canada
Because Canadians are among the world’s greatest greatest users of technology when it comes to money and banking
Who has the greatest ABM’s and next to whom?
Canada has more ABMs, per million people, than any other country in the world, and is second only to Sweden in the number of electronic transactions made per person per year
What are the 3 different types of reserves and what do they do?
REQUIRED RESERVES
Bank of Canada required Banks to keep 15% of their clients account balances with the Bank of Canada.
This was Eliminated in 1991
FRACTIONAL RESERVES
Reserves are determined by the banks and set how much of clients balances to keep on reserve.
Determined on the clients banking activity provisioned by the banks. Reserves are usually 5%-9% of their account balances.
EXCESS RESERVES
The amount of cash this is over the banks target reserve level.
This excess reserve is used to create Loans that pay interest to the banks off these loans.
Calculate Target Reserves and Excess Reserves
Target Reserves = Deposits x Rate
$1,000 x 5% = $50
$950 x 5% = $48
Excess Reserves = Deposits - Target Reserve
$1,000 - $50 = $950
$950 - $48 = $902
Calculate the Money Multiplier
MM = 1 / Target Reserve Ratio MM = 1/5% MM= 20
Future Value = (Deposit x MM) - Deposit
FV = ($1,000 x 20) - $1000
FV = $20,000 - $1,000
FV = $19,000
