14 -- Part 3: Deficit Spending and the Public Debt
10 percent is the reserve ratio.
In decreasing order of new deposits created, the banks are all aligned.
The $100,000 of new Bank 1 gets $100,000 in new reserves and $90,000 in loans.
The ratio of the new reserves to the process is 10 percent.
The total money supply in circulation is affected by a multiple contraction of deposits.
A $100,000 increase in reserves generated by the Fed's purchase of a security resulted in a $1 million increase in transactions deposits and a $1 million increase in the money supply.
The money supply increased by a multiple of 10 times the initial $100,000 increase in overall reserves.
A $100,000 decrease in reserves generated by the Fed will result in a decrease in total deposits of $1 million, which is a multiple of 10 times the initial $100,000 decrease in overall reserves.
When the banking system's reserves are increased or decreased, we can make a generalization about how much money will change.
The money multiplier is 10.
A change in reserves in the banking system leads to a change in the money supply.
The reserve ratio is assumed to be the same as the currency.
It is divided by the reserve ratio.
The potential money multiplier is equal to 1 divided by the fraction of transactions deposits that the banks hold as reserves.
The reserve ratio was 10 percent or 0.10 as a decimal fraction.
The potential money multiplier was equal to 1 divided by 0.10, which equates to 10.
When borrowers want to hold a portion of their loans as currency outside the banking system, these funds cannot be held by banks as reserves from which to make loans.
The potential money multiplier is larger than the actual money multiplier because borrowers hold a portion of loan proceeds as currency.
The banking system as a whole rarely has a potential money multiplier.
Each definition of the money supply, M1 or M2, will have a different money multiplier.
The M1 multiplier has ranged between 1.5 and 2.0.
The M2 multiplier rose from over 12 in the mid-2000s to over 6.5 in the 1960s.
Open market operations seem complicated and the Fed can induce banks to hold reserves.
The reserve ratio in monetary policy could be varied by the Federal Reserve.
The reserve ratio has fallen to less than half of its mid-2000s level due to the rise in the M2 multiplier.
Problems in regulating the money generating variations in the quantity of money in circulation has been a fundamental way in which the Federal Reserve has been.
There is a change in interest.
Congress granted the Fed authority to pay rate on reserves that will bring about desired reserve interest on reserves that depository institutions hold with ratio without generating a larger-than-intended multiplier Federal Reserve district banks.
Paying a higher rate of effect on the money supply has proved to be a challenge.
The answers can be found on page 344.
The reserve ratio is the number of vault cash and deposits that a depository institution has.
The amount of transactions that depository institutions hold as reserves is a fraction.
The Federal Reserve can use an open market purchase of U.S. government bonds to generate an expansion of deposits with fractional reserve banking.
A multiple of the open market purchase is the change in the money supply.
The effect of fractional reserve banking is to make depository institutions vulnerable.
The institutions only have a small amount of reserves on hand to honor requests for withdrawals.
The bank wouldn't be able to sit for many of the bank's depositors.
The depository institution would fail.
Many institutions could fail because of widespread bank runs.
When businesses fail, they create hardship for their stakeholders.
Many individuals and businesses depend on the safety and security of banks when a depository institution fails.
Many banks failed prior to the creation of federal deposit insurance.
Until the mid-1980s, bank failures were rare.
The failure rates went up in the early and late 2000s.
During the Great Depression, the average number of failures soared to over 3000 a year.
In 1971 the agency that insured the deposits in savings and loan associations and mutual savings banks was held by most depository institutions.
All U.S. banks are insured in this way.
The period from 1935 until the 1980s was relatively quiet.
Nine banks failed annually from World War II to 1984.
Nine failures were averaged from 1995 to 2008.
More than 300 banks failed in the last two years, and hundreds more are in danger of failing.
We will look at the reasons soon.
We need to understand how deposit insurance works.
The following scenario should be considered.
A bank is shaky.
Its assets don't seem to be enough to cover its debts.
Depositors will want to withdraw their funds from the bank at the same time if the bank has no deposit insurance.
Their concern is that the bank won't have enough assets to return their deposits in currency.
When insurance doesn't exist, this is what happens in a bank failure.
When a bank goes under, all of the people who are owed money may not get paid, or they may get paid less than they are owed.
Depositors are the creditor of a bank because their funds are on loan.
Banks do not hold all of their funds as cash.
Most of the deposit funds are lent to borrowers.
All depositors can't withdraw their funds at the same time.
To keep up with the latest issues in deposits converted into cash when they want, no matter how serious the financial deposit insurance and banking situation of the bank is.
Depositors' premiums were paid into funds that would reimburse them in the event of a bank failure.
Depositors were given the incentive to leave their deposits with the bank even in the face of widespread talk of bank failures because of the FDIC's insurance of deposits.
It was enough to cover each account up to $2,500 in 1933.
$250,000 per depositor per institution is the current maximum.
All insured depository institutions paid the same small fee for coverage.
Their fee was unrelated to how risky their assets were.
A depository institution that made loans to companies such as Dell, Inc., and Microsoft Corporation paid the same deposit insurance premium as another depository institution that made loans to the governments of developing countries that were on the verge of financial collapse.
Although deposit insurance premiums were adjusted in response to the riskiness of a depository institution's assets, they never reflected all of the relative risk.
A fundamental flaw in the deposit insurance scheme is the lack of correlation between risk and premiums.
Bank managers don't have to pay higher insurance premiums when they make riskier loans because they have an incentive to invest in more assets of higher yield, and therefore higher risk, than they would if there were no deposit insurance.
The insurance scheme has a problem with the premium rate being artificially low.
Depositors will accept a lower interest payment on insured deposits, which allows depository institution managers to obtain deposits at less than full cost.
Managers can increase their profits by using insured deposits to purchase riskier assets.
Managers and stockholders of depository institutions accrue gains from risk taking.
The losses go to the deposit insurer.
There are flaws in the financial industry and in the deposit insurance system that need to be fixed.
The risk-taking temptations of depository institution managers can be mitigated by the federal deposit insurance agencies.
The regulatory powers include the ability to require higher capital investment, to regulate, examine, and supervise bank affairs, and to enforce regulatory decisions.
Basic flaws remain despite higher capital requirements imposed in the early 1990s and adjusted in 2000.
The FDIC is a government-run insurance company.
The federal government is exposed to the same kinds of asymmetric information problems that other financial institutions face.
The way this works with the deposit insurance provided by the FDIC is interesting to examine.
Deposit insurance protects depositors from the potential adverse effects of risky decisions and makes them willing to accept riskier investments from their banks.
Protection of depositors from risks encourages more high-flying, risk-loving entrepreneurs to become managers of banks.
Depositors have little incentive to monitor the activities of insured banks, so the insurance is likely to encourage crooks to enter the industry.
Larger losses are the consequences of the FDIC.
The deposit insurance provided by the FDIC is an important phenomenon in the presence of insurance contracts.
If the bank fails, insured depositors will not suffer losses.
They don't have much incentive to monitor their bank's investment activities or to punish their bank if they assume too much risk.
Banks that are insured have incentives to take more risks.
The Federal Deposit Insurance Reform Act was passed in 2005.
The law expanded deposit insurance coverage and may have added to the system's moral hazard problems.
It increased deposit insurance coverage for Individual Retirement Accounts offered by depository institutions from $100,000 to $250,000 and allowed the FDIC to adjust the insurance limit on all deposits to reflect inflation.
The act gave the FDIC better tools to address moral hazard risks.
The rule that prevented the FDIC from charging deposit insurance premiums was changed by the law.
Most U.S. depository institutions were able to avoid paying deposit insurance premiums for about a decade because of this limit.
At any time, the FDIC can adjust insurance premiums.
Congress sought to increase the public's confidence in depository institutions by temporarily extending federal deposit insurance to cover almost all of the deposits in the banking system.
The move increased the moral hazard risks of deposit insurance.
The FDIC took advantage of its expanded powers to charge insurance premiums again.
The failures of banks and savings institutions caused the FDIC to impose special premiums to replenish its insurance funds.
Most economists agree that the federal deposit insurance system's exposure to moral hazard risks has increased in recent years.
The answers can be found on page 344.
On the other hand, the Federal Deposit Insurance Reform runs and Congress created the hazard risks in 1933.
Since the advent of ated with deposit insurance by increasing limits for federal deposit insurance, there have been no true bank retirement deposits at federally insured banks.
Depositors are protected from hazard risks by federal insurance of bank deposits.
Bank managers have an incentive to invest in assets to make higher rates of return.
A novel medium of exchange called ing is being worked on by people in Riverwest, Wisconsin, as a way to exchange goods and services.
Local businesses will offer a price.
If businesses in the Riverwest show prices in terms of counts to anyone who uses River Currency, then they should.
The purpose of most currency programs is to encourage people to purchase items from local businesses.
For 75 years, federal deposit insurance coverage was capped at no more than $100,000 per account, but in 2010 Congress permanently expanded N Federal Deposit Insurance most limits for coverage by the Federal Deposit Insurance Corporation to $250,000 per account.
They can make money from helping people get insurance for large sums.
When the largest depositors have seen evi, their does not mean that individuals and families cannot receive threats to remove their funds from the bank have helped to federal deposit insurance protection for larger pools of deposits.
Many entrepreneurs have large pools of funds.
There is an increase in moral hazard funds.
Each customer has a single account with the firm, problem of deposit insurance--that is, a greater potential but the entrepreneurs then deposit the funds in that account for bank managers to direct federally insured deposits to into multiple bank accounts on the customer's behalf.
The activities raise taxpayers' risks.
There are many studies by financial economists.
Some economists suggest that we replace our system of taxpayer-guaranteed federal deposit insurance with a requirement that banks get deposit insurance from private insurers.
You should know what to know after reading this chapter.
The Animated Figure 15-1 fiduciary monetary ing to accept the good in exchange for other goods system and services will only function if people are widely accepted.
If the value of money is relatively predictable, people will continue to use money even if inflation erodes its real purchasing power.
Currency, transactions deposits, and traveler's depository institutions are included.
322 money's role as a temporary store of value is stressed in a broader definition.
There is information in financial transactions.
The system consists of 12 district banks.
The Board of Governors is the governing body of the Fed.
The Fed's main functions are to supply fiduciary currency, clearing payments, holding banks' reserves, acting as the government's fiscal agent, supervising banks, acting as a lender of last resort, regulating the money supply, and intervening in foreign exchange markets.
There is a reserve ing system.
The deposit can lend out funds in excess of potential money of those it holds as reserves, which will generate a rise in deposits at another bank.
Table 15-3 has 334 over and above those held as reserves.
The FDIC is a risk taking corporation.
The agency places depository institutions premiums in accounts for use in reimbursing failed banks' depositors.
Deposit insurance can attract risk-taking individuals into banking.
When deposit insurance premiums don't reflect the full extent of the risks taken on by bank managers and when depositors have little incentive to monitor the performance of the institutions that hold their deposit funds, there is a moral hazard problem.
Log in to MyEconLab, take a chapter test, and get a personalized study plan that tells you which concepts you understand and which ones you need to review.
MyEconLab will give you further practice, as well as videos, animations, and guided solutions.
An elderly widow holds chases.
Match each of the rationales for financial inter the side of his or her home as a sign to others of mediation listed below with at least one of the accumulated purchasing power that would hold following financial intermediaries: insurance value for later use in exchange.
What ways did you make your decisions?
Do you know if each of the following tables were updated daily?
Although people pose an adverse selection problem, they continued to buy goods and services and make loans in the financial markets.
A loan application does not mention that a legal discovered that the real value of its tax receipts judgment in his divorce case will be falling dramatically.
He made alimony payments to his ex-wife.
An individual who was recently approved for a loan to start a new business decides to use some of the money for taxation.
The funds are needed to take a Hawaiian vacation.
Like a private banking, the Fed remained stable.
It's more like a gov terms of the regular currency.
The data is centered just west of the Mississippi lions of U.S. dollars.
It is equal to 4 if you borrow from a Federal Reserve district.
Transactions deposits are issued by the Federal Reserve district bank and depository institutions.
20 percent is the reserve ratio.
A bank sells $1 billion in government securities.
How will total deposits in the banking system be credited to the dealer's account?
If the Federal Reserve purchases ratio is 15 percent, the reserve will change.