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## Macroeconomics

### Course: Macroeconomics>Unit 4

Lesson 3: Fractional reserve accounting

# Simple fractional reserve accounting (part 1)

In this video, Sal begins a walkthrough of the process of money creation using a highly simplified example. Created by Sal Khan.

## Want to join the conversation?

• At what does IOU mean?
• It literally just means "I owe you". It is basically just one party acknowleging its debt to another party. In this case, it is the borrower acknowledging that they owe the bank \$1.00.
• When the client deposits his money in the bank, the bank has 110 worth of assets, so basically they could lend 99M and keep 11M as reserves right ?
• Remember the first \$10M of assets is the physical bank, ATMs, computers, and so on, not monetary reserves. They can't really lend that stuff out and still exist as a bank.
• What is "offset" mean? What about the intreast
• A[\$100m]L[\$100m] the liabilities "offset" the assets because they net out to zero.The interest is the reason why the banks lend it out, and the percentages can vary
• How can i find Ending Equity with only Beginning Assets, Beginning Liabilities, Common Stock, Revenue, Expense, Dividends and Ending Liabilities?
• Beginning assets minus beginning liabilities equals beginning equity.
Add revenue, subtract expense, subtract dividend. If there was no change in common stock, that would give you ending equity. If there was a change in common stock then you have to add or subtract that.
• Would the IOU asset possibly now include an interest rate? So, if the bank loaned \$1 but charged at 10% interest can they now claim \$1.10 in assets?
• Yes, if a bank loans money out, they will also charge interest. So if they lend our \$1 for a year, and they also charge 10% interest per year they can demand \$1.10 a year from now.
• Is 90% a realistic lending rate? Or is that an arbitrary number. I would imagine a bank lends more than 90% of its deposits.
(1 vote)
• It is actually a realistic lending rate. However, it depends on the required reserve ratio that the Federal Reserve institutes in each bank. The Fed can definitely institute a required reserve of 10%, meaning that 90% of a deposit is considered excess reserve. The banks can definitely loan out all of their excess reserve, but they also have the ability to keep some of it.
• why is money so important?
(1 vote)
• it is the form of exchange that we use in this world at this time. instead of having to trade physical objects to obtain something. people can just "trade" that item they want for money. It also works well because people are able to get what they want without having to figure out what the other person wants in return for that product. hope this helps!
• A family decides that they can spend 35 of their monthly income on house payments. If their monthly income is \$1,000 , how much can they spend for house payments?

They can spend \$ on house payments
(1 vote)
• 35% of their monthly income or just \$35 dollars? If it is in fact 35%, then that family could pay \$350 every month on house payments.
(1 vote)
• Fractional reserve means infinite money for the banks out of nothing.