Concepts
- Reserves
- Required Reserve Ratio
- Excess Reserves
- Fractional Reserve Banking System
- Multiple-Deposit Expansion (Creation of Money Through Lending)
- T-Accounts/Balance Sheets (A Way to Track Creation of Money)
- Money Multiplier
Overview
In the United States, we have a Fractional Reserve Banking System. This means that when you deposit money into your bank account, the bank doesn’t just lock it all up in the vault. Instead, your bank only keeps a FRACTION of your deposit as reserves (cash in the vault) and lends out the rest. This process of lending is what allows banks to literally create money. Next, we learn about T-Accounts. T-Accounts allow us to track the creation of money when banks lend it out. It’s an accounting concept that shows us how banks record deposits along with the loans and reserves that those deposits create. Finally, we learn about the money multiplier. The money multiplier allows us to calculate the overall increase to the money supply and/or the increase to bank deposits when somebody deposits money into their bank.
Materials
Lecture
Video Coming at Later Date
Quiz
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