AP® Macroeconomics Crash Course, For the 2021 Exam, Book + Online by Welker Jason;

Author:Welker, Jason;
Language: eng
Format: epub
Publisher: Research & Education Association
Published: 2020-08-15T00:00:00+00:00

ii.A bank’s assets always equal its liabilities. Here are more details about the different parts of the Bank of White Oak’s balance sheet. First, the liabilities:

Demand deposits = $20,000. This is the money bank customers have deposited and are able to write checks against or use their debit cards to make purchases. Demand deposits are a liability for the bank because they are other people’s money. The bank is obliged to provide the depositors with these funds upon request.

Owner’s equity = $5,000. Owner’s equity is the money the bank’s founders (or investors) pitched in to start the bank with. This is a liability for the bank because if any investor sought to withdraw their equity and invest it elsewhere the bank would owe the individual his or her share of the equity.

The bank’s total liabilities are the money it owes people, either depositors or the bank’s investors.

Here are the assets:

–Reserves = $5,000. Reserves are the portion of the bank’s total deposits that the bank has not loaned out. This is “cash on hand” at the bank (or, more likely, at the central bank in whatever country the Bank of White Oak operates).

–Loans = $15,000. Loans are the money the bank has loaned to private borrowers (such as businesses or households who have borrowed to invest in capital or housing). Loans are an asset because they represent money owed to the bank.

–Government bonds = $3,000. Government bonds are bank loans to the government. As discussed earlier, bonds are certificates of debt owed to the holder of the bond by the issuer of the bond. Since the government owes the bank this money, it is an asset for the bank.

–Property = $2,000. The bank’s property is the physical capital of the bank itself. This includes any buildings, land, computers, desks and chairs, and all other physical assets owned by the bank.

–The bank’s total assets are the money it is owed by others, the money it has on hand (reserves), and the bank’s physical property.

B.Money Creation. By accepting deposits from households, then lending those deposits to borrowers, which end up being deposited and lent again and again, banks create new money through their daily financial activities.

1.Commercial banks must keep a certain percentage of deposits in reserve. Required reserves are the portion of a bank’s deposits the bank is required by the country’s central bank to keep in reserve. For example:

i.A reserve requirement of 20% means that a bank with total deposits of $1 million would have to keep $200,000 on reserve at the central bank. This money may not be loaned out by the commercial bank.

ii.With the other $800,000, the bank can make loans and charge interest on those loans. The bank’s business model is to charge a higher interest rate to borrowers than it pays to households saving money with the bank.

2.Excess reserves are a bank’s actual reserves minus required reserves. Banks are allowed to make loans only from their excess reserves.

i.The following table highlights the balance sheet of the Bank of YourTrust.

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