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Main content
Current time:0:00Total duration:8:44
AP.MACRO:
POL‑2 (EU)
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POL‑2.A (LO)
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POL‑2.A.1 (EK)
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POL‑2.A.2 (EK)
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POL‑2.A.3 (EK)
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POL‑2.A.4 (EK)
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POL‑2.A.5 (EK)
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POL‑2.A.6 (EK)
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POL‑2.A.8 (EK)

Video transcript

the following is the balance sheet of first Superior Bank and so let's here on the asset side it has 200 dollars of reserves and 1800 dollars of loans so it's total assets are two thousand dollars and then that should be the same as its liabilities and equity and we see here that it has two thousand dollars in demand deposits that's a liability because people can come to the bank and say hey I want that money these are checkable deposits so they could even try to withdraw that money and since all of that two thousand dollars is on the liability side there is no equity right over here these two should sum up to two thousand dollars the same as you have on your assets I'd assume that the required reserve ratio is ten percent and just as a review that's the percent of deposits that the bank needs to keep as reserves and we can see that it's at that reserve ratio right now it has two thousand dollars in deposits and so it needs to keep ten percent adds reserves ten percent of two thousand dollars is two hundred dollars so it's at its minimum reserves already Part A says what is the dollar value of new loans that first superior bank can make explain pause this video and see if you can figure that out yourself well as I just mentioned this Bank is already at its minimum or reserves it's already loaned out as much as it could if you get two thousand dollars in deposits and you have a ten percent reserve ratio that means you can loan out ninety percent of that two thousand dollars and it has already loaned out ninety percent of the two thousand dollars so what is the dollar value of new loans that first superior bank can make well it's $0 zero dollars because because already already at minimum reserves minimum reserves alright let's do Part B mr. Smith deposits one hundred dollars of cash in a demand deposit account in first Superior Bank calculate the maximum amount of new loans that first Superior Bank can now make so pause this video again and see if you can figure that out well there's a couple of ways you could think about it before mr. Smith makes that deposit we already saw in part a that first Superior Bank can't make any new loans and so now if it gets a hundred dollars of cash in a demand deposit account because the reserve ratio is 10% the bank needs to keep 10% of that deposit as reserves and it can loan out the other 90% so you could just say well it can loan out 90% of that new deposit and so it'd be 90% times 100 dollars which is equal to 90 dollars of new loans another way that you could think about it is after mr. Smith's deposit the demand deposits right over here goes to $2,100 and that increase in liabilities is offset by an increase in assets it just got a hundred dollars of cash so the reserves go from $200 to $300 now this point first superior Bank is clearly above its minimum reserve requirements 300 over 2100 is more than 10% so it can loan out some money how much can it loan out what has to keep 10% of this 2,100 as reserves so it needs to keep 210 right over here and so that other 90 it could loan out and so this could be 1890 and so it can make $90 in new loans as a result of mr. Smith's $100 cash deposit calculate the maximum change over time in each of the following in the banking system so part one is loans so what's the maximum change over time in the banking system of loans pause this video and try to figure it out well as we just said mr. Smith by depositing 100 dollars first superior bank can make $90 of loans so that would be $90 of new loans but then whoever they loaned that money to they could then deposit that in a bank and then that bank could the pot could loan out 90% of that so then it would be zero plus 0.9 times 90 now this bank that got 0.9 ninety dollars which is $81 it can then loan out ninety percent of that so it's going to be plus 0.9 times this was 0.9 squared times 90 and you just keep going like this and then this gives us essentially the equation for the multiplier which you might have memorized this is just going to be equal to 90 times 1 / 1 - you could say this 0.9 or you could say this is the same thing as 90 times 1 over the reserve ratio which is 0.1 and 1 over 0.1 is 10 so this is going to be equal to $900 now what is going to be the maximum change over time in demand deposits pause this video again and try to figure that out when mr. Smith first deposits that hundred dollars in cash at first Superior Bank that creates $100 increased demand deposit here on first superior banks balance sheet so that is let me just write it this way so you have 100 but then we already said that first superior bank could loan out as much as 90% of that and whoever they loaned that to they could put all of that into a bank as a demand deposit and so that's going to be plus 0.9 times 100 and then that Bank could then loan out 0.9 times this and then whoever gets to that loan that kid that could be they could deposit into the bank creating a demand deposit so plus 0.9 squared times 100 and it keeps going on and on and on and you could just view this as this is going to be equal to 100 times 1 over 1 minus 0.9 which is the same thing as 100 times 1 over the reserve ratio and so this is just going to be 100 times 10 which is going to be $1,000 Part D as a result of mr. Smith's $100 cash deposit calculate the maximum change over time in the money supply so pause this video again and try to think about it so you might be tempted to say hey maybe that's just going to be the same thing as a total maximum change in demand deposits but we have to be very careful that first hundred dollars already existed as cash in the money supply the maximum change is everything else it's this part right over here mr. Smith deposits $100 in cash that's not new money but then the bank can loan out 90% of that so that's 90 dollars in new money that someone could use to then deposit in another Bank and so that other Bank could then loan out 90% of that 90 and we've seen this drill before that was the exact same calculation for part 1 right over here this is just going to be equal to 90 times 1 over the reserve ratio which is equal to $900 part-ii provide one reason why the actual change in money supply can be smaller than the maximum change you identified in Part D pause this video and see if you can figure that out well there's actually two good reasons why the actual change in money supply might be smaller than what we just calculated one reason is if banks decide to keep more than the minimum reserves so banks banks might keep more than minimum minimum reserves so you could imagine even though by law according to this world they have to keep a reserve ratio of 10% if on average the banks decide to keep a reserve ratio of 20% then every time they would loan out 80% of whatever they get in deposits and so you would have a lower number here there's another world where the people who get the loans don't deposit all of that into the banking system so if you wanted a second reason we've already answered their question we've given one reason but a second reason is people might not deposit all of their funds in the banking system so I will leave you there
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