Banking and Monetary Policy

TOPIC II: The Commercial Bank and the Creation of Money

1. define the characteristics of a balance sheet
2. define how a simple banking transaction takes place.
3. describe how deposit expansion and money creation takes place within the banking system.
4. define the money multiplier and describe how it works.

KNOW THE FOLLOWING TERMS

deposit multiplier	discount rate
excess reserves	open market operations
required reserve ratio	required reserves
excess reserves

KEY CONCEPTUAL QUESTIONS

1. How is money created and how is money destroyed?
2. What happens to the total money supply when a person deposits in one depository institution a check drawn on another depository institution?
3. What happens to the overall money supply when a person who sells a U.S. government security to the Federal Reserve places the proceeds in a depository institution?