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Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition

Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition. Chapter 14: Money and the Banking System. The Banking System. How the payments system works. Check processing systems: 1) Within a bank 2) Local clearinghouses 3) Correspondent banks.

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Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition

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  1. Contemporary Economics:An Applications ApproachBy Robert J. Carbaugh1st Edition Chapter 14: Money and the Banking System

  2. The Banking System How the payments system works Check processing systems: 1) Within a bank 2) Local clearinghouses 3) Correspondent banks 4) the Federal Reserve System's check collection network: A consumer in Albany, NY buys a painting from a gallery in Sacramento, CA. The buyer sends a check written on her account in an Albany bank. FRB of San Francisco adds the amount to the Sacramento bank's account, and the gallery's account is increased. The gallery deposits the check in their account in a Sacramento bank. The Sacramento bank deposits the check for credit in its account at the FRB of San Francisco. The FRB of New York pays FRB of San Francisco from its share in the inter-district settlement fund. The FRB of San Francisco sends the check to the FRB of New York for collection. The Albany bank tells the FRB of New York to deduct the amount of the check from its account. The FRB of New York sends the buyer's check to her bank in Albany, which deducts the amount from her account there. Carbaugh, Chap. 14

  3. Money Measuring the money supply The M1 measure of US moneysupply, December 1998 Component $ billions % of total Currency 460.1 42 Demand deposits 376.7 34 Other checkable deposits 247.2 23 Traveler's checks 8.3 1 Total 1,092.3 100 M1 = currency in the hands of thepublic + demand deposits +other checkable deposits +traveler's checks Source: Federal Reserve Bulletin, March 1999 Carbaugh, Chap. 14

  4. Banking The business of banking Consolidated balance sheet for all US commercial banks, December 1998 ($ bill.) Assets Liabilities and net worth Reserves 249.5 Deposits 3,321.0 Loans 3,316.3 Checking deposits 665.2 Commercial/industrial 945.0 Savings/time deposits 2,655.8 Real estate 1,323.9 Borrowings 984.7 Consumer 503.7 All other liabilities 560.0 Other 543.7 Total liabilities 4,865.7 Securities 1,235.8 Net worth (assets-liabilities) 421.6 US Government 792.9 Other 442.9 All other assets 485.7 Total assets 5,287.3 Source: Federal Reserve Bulletin, March 1999 Carbaugh, Chap. 14

  5. Money Process of money creation Money multiplier = 1/required reserve ratio (a) Wells Fargo Bank Assets Liabilities Required reserve = $100 Checking deposits = $1,000 Loans = $900 (b) U.S. Bank Assets Liabilities Required reserve = $90 Checking deposits = $900 Loans = $810 (c) Rainier Bank Assets Liabilities Required reserve = $81 Checking deposits = $810 Loans = $729 Carbaugh, Chap. 14

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