So, how do banks "create" money? You'll probably be surprised to learn that much of the cash in the money supply is somewhat illusory, "created" by the ability of banks to lend their deposits to other borrowers. Read the scenario below to understand how the process functions. How Does It Work You're going to start with $100 worth of cash money. You've decided to give that $100 to Ralph as a "gift" and suggest that he deposit it in the bank for a little "cushion". Now remember, the Federal Reserve requires all banks to hold 7% of all deposits in reserve but allows the bank to lend the remainder. Jake comes into the bank and requests a loan of $93 to buy a Bluetooth player from Sarah. Sarah decides to deposit the money in the bank. Al comes to the bank and requests a loan of $86 from the bank to buy a textbook from his friend Joe. Joe decides to deposit the money from the textbook sale in the bank. Farrah has seen a jacket owned by Trudy that she just has to have, so she goes to the bank and borrow $80 from the bank to buy the jacket. Trudy is pleased that she sold the jacket because she can now pay her phone bill, so she deposits the money in the bank. 1. How much money has each of these depositors put in the bank? Ralph 100 Sarah Joe Trudy- 2. What is the total of deposits made
So, how do banks "create" money? You'll probably be surprised to learn that much of the cash in the money supply is somewhat illusory, "created" by the ability of banks to lend their deposits to other borrowers. Read the scenario below to understand how the process functions. How Does It Work You're going to start with $100 worth of cash money. You've decided to give that $100 to Ralph as a "gift" and suggest that he deposit it in the bank for a little "cushion". Now remember, the Federal Reserve requires all banks to hold 7% of all deposits in reserve but allows the bank to lend the remainder. Jake comes into the bank and requests a loan of $93 to buy a Bluetooth player from Sarah. Sarah decides to deposit the money in the bank. Al comes to the bank and requests a loan of $86 from the bank to buy a textbook from his friend Joe. Joe decides to deposit the money from the textbook sale in the bank. Farrah has seen a jacket owned by Trudy that she just has to have, so she goes to the bank and borrow $80 from the bank to buy the jacket. Trudy is pleased that she sold the jacket because she can now pay her phone bill, so she deposits the money in the bank. 1. How much money has each of these depositors put in the bank? Ralph 100 Sarah Joe Trudy- 2. What is the total of deposits made
Chapter1: Making Economics Decisions
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am. 184.
Transcribed Image Text:So, how do banks "create" money? You'll probably be surprised to learn that much of the cash in the money supply is somewhat illusory, "created" by the ability of banks to lend
their deposits to other borrowers. Read the scenario below to understand how the process functions.
How Does It Work
You're going to start with $100 worth of cash money. You've decided to give that $100 to Ralph as a "gift" and suggest that he deposit it in the bank for a little "cushion". Now
remember, the Federal Reserve requires all banks to hold 7% of all deposits in reserve but allows the bank to lend the remainder.
Jake comes into the bank and requests a loan of $93 to buy a Bluetooth player from Sarah. Sarah decides to deposit the money in the bank.
Al comes to the bank and requests a loan of $86 from the bank to buy a textbook from his friend Joe. Joe decides to deposit the money from the textbook sale in the bank.
Farrah has seen a jacket owned by Trudy that she just has to have, so she goes to the bank and borrow $80 from the bank to buy the jacket. Trudy is pleased that she sold the
jacket because she can now pay her phone bill, so she deposits the money in the bank.
1. How much money has each of these depositors put in the bank?
Ralph 100
Sarah
Joe
Trudy-
2. What is the total of deposits made
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