L17 - Models of the Banking System

Question 1

What is the history of Goldsmiths?

Answer 1

-People began to store their gold with goldsmiths

• Then given a receipt saying the depositors has X
  amount of gold (used as paper money)
• Their reliability led to receipts being used as money
• Goldsmiths found that people didnt withdraw gold
  often so they’d lend it out. Turning them into quasi-
  banks

Question 2

What is Fractional banking?

Answer 2

-The banking system used today

-Not needing to keep all the deposits to cater for their
customers. Issuing most of it as loans instead in turn
increasing money supply.

Question 3

Whats the problems with fractional banking?

Answer 3

In the case of Goldsmith’s:

• Once they started making loans, their receipts outstanding (claims on gold) were greater than the amount of gold they had in their vaults at any given moment.
• Normally this is fine. But if in situation where banks not trusted people will pull money out of banks (Run on the banks) causing problems paying other back.

Question 4

What is the benefit to the ratios approach to the creation of money (credit creation)?

Answer 4

Best suited for showing the relation between reserves and deposit money

Question 5

What is the benefit to the Competitive Banking model?

Answer 5

Better suited to understanding:

• the forces of competition between banks themselves and;
• The competition between banks and other channels of financial intermediation (such as securities markets)

Question 6

What is the Money Multiplier?

Answer 6

M= (b+1)/(b+x)

• Where b is the bank deposit in cash
• Where X is the reserve ratio
• Where H is the high powered money

Tells us how much bigger is the money supply than the cash base of the system

Question 7

How do you calculate the total money supply? (M)

Answer 7

M= C + D

OR:

M= (1+b)/(1+x)+H

• Where M is the money supply
• Where C is the cash held by the non-bank public
• Where D is the size of the bank deposit

Question 8

How do you calculate high powered money? (H)

Answer 8

H= C + R

• Where H is the high powered money
• Where C is the cash held by the non-bank public
• Where R is the cash held in bank reserves

Question 9

How do you calculate the cash held in bank reserves? (R)

Answer 9

R= xD

• Where R is the cash held in bank reserves
• Where x is the reserve ratio of banks
• Where D is the size of bank deposit

Question 10

How do you calculate the cash held by the non-bank public? (C)

Answer 10

C= bD

• Where C is the cash held by the non-bank public
• Where b is the bank deposit in cash
• Where D is the size of the bank deposit

Question 11

ALL DIAGRAMS AND FULL EXPLANATION OF THEM ON NOTES IN BOOK

Answer 11

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