Friday, March 25, 2011

How Banks and Thrifts Create Money


Students shall be able to

  1. Recount the story of how fractional reserves began with goldsmiths.

  2. Explain the effects of a currency deposit in a checking account on the composition and size of the money supply.

  3. Compute a bankís required and excess reserves when you are given its balance sheet figures.

  4. Explain why a commercial bank is required to maintain a reserve and why it isnít sufficient to cover deposits.

  5. Describe what happens to the money supply when a commercial bank makes a loan or buys securities.

  6. Describe what happens to the money supply when a loan is repaid or a bank sells its securities.

  7. Explain what happens to a commercial bankís reserves and checkable deposits after it has made a loan.

  8. Describe how a check drawn on one commercial bank and deposited in another will affect the reserves and excess reserves in each bank after the check clears.

  9. Describe what would happen to a single bankís reserves if it made loans that exceeded its excess reserves.

  10. Explain how it is possible for the banking system to create an amount of money that is a multiple of its excess reserves when no single bank ever creates money greater than its excess reserves.

  11. Compute the size of the monetary multiplier and the money creating potential of the banking system when provided with appropriate data.

  12. State the two leakages that reduce the money creating potential of the banking system.


  1. Activity 37 from the NCEE AP Macro curriculum.


  1. Complete "Multiple Expansion of Checkable Deposits"


Monitor and adjust to check understanding.